New LTCG Tax Rates Favorable for Most Property Sellers

The recently announced long-term capital gains tax rate reduction, from 20% to 12.5%, is designed to benefit property sellers unless annual appreciation is unrealistically low, under 9%. Despite the removal of indexation benefits, higher nominal returns on real estate, typically 12-16%, make the new rates advantageous.

The recently announced long-term capital gains tax (LTCG) rate reduction in the budget is poised to benefit property sellers, provided the annual appreciation of the real estate exceeds 9%, according to sources.

The budget has reduced the LTCG rate from 20% to 12.5% but abolished the indexation benefits. The changes will take effect from July 23, 2024.

Previously, indexation allowed for gains adjustment according to inflation, but the nominal returns on real estate, typically between 12% and 16%, often surpass inflation rates of 4-5%, depending on holding periods, sources revealed.

Scenarios where returns are less than 9-11% annually, wherein the old tax regime might have been more advantageous, are both rare and considered unrealistic in the real estate market, affecting only about 10% of cases, sources added.

An analysis by the income tax department finds the new tax structure beneficial for properties held for 5 years if prices have increased by 1.7 times or more, for 10 years if values have risen 2.4 times or more, and significantly favorable for properties bought in 2009-10 if values have multiplied by 4.9 times or more.