Selling a property this year? Why the new 12.5% capital gains tax may not always reduce your tax bill

Property owners planning to sell a house or other real estate this financial year should not automatically assume that the new 12.5% long-term capital gains (LTCG) tax rate will result in lower taxes. For many taxpayers who purchased their property on or before 22 July 2024, opting for the older 20% tax with indexation could actually lead to a smaller tax liability.

The Finance (No. 2) Act, 2024 changed the taxation of long-term capital gains on immovable property. While the government reduced the LTCG tax rate to 12.5% without indexation, it also introduced a relief provision allowing certain taxpayers to continue benefiting from the previous regime if it proves more advantageous.

Under the current rules, resident individuals and Hindu Undivided Families (HUFs) selling land or buildings acquired on or before 22 July 2024 can calculate their tax liability under both methods. They can either pay 20% tax after claiming indexation benefits or 12.5% tax without indexation, whichever results in the lower tax outgo.

Why indexation still matters

Indexation adjusts the purchase cost of a property for inflation using the government's Cost Inflation Index (CII). By increasing the property's cost of acquisition, it reduces the taxable capital gain, which can significantly lower the tax payable, particularly for properties held for many years.

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This is why a higher tax rate does not necessarily translate into a higher tax bill.

For example, consider a property purchased in 2010 for Rs 50 lakh and sold in 2026 for Rs 1.5 crore. Assuming the indexed cost rises to Rs 90 lakh, the taxable capital gain under the old regime becomes Rs 60 lakh.

Applying the 20% tax rate results in a tax liability of Rs 12 lakh.

Under the new regime, however, indexation is not permitted. The taxable gain is calculated using the original purchase price, resulting in a capital gain of Rs 1 crore. At the new tax rate of 12.5%, the tax payable works out to Rs 12.5 lakh.

Despite the lower tax rate, the taxpayer ends up paying Rs 50,000 more because the benefit of indexation is lost.

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Who can choose between the two options?

The choice is available only to resident individuals and HUFs selling long-term capital assets in the form of land or buildings that were acquired on or before 22 July 2024.

If the property was purchased on or after 23 July 2024, the old indexation regime is no longer available. Such transactions are taxed at 12.5% without indexation, subject to the conditions laid down under the Income Tax Act.

To qualify as a long-term capital asset, the property must generally have been held for more than 24 months before its transfer.

Particulars	Old Rule (20% with Indexation)	New Rule (12.5% without Indexation)
Applicable to	Resident individuals/HUFs who bought property on or before 22 July 2024 (optional)	All eligible long-term property sales; mandatory for properties bought on or after 23 July 2024
Tax Rate	20%	12.5%
Indexation Benefit	Available	Not available
Purchase Price (Example)	₹50 lakh	₹50 lakh
Sale Price (Example)	₹1.5 crore	₹1.5 crore
Indexed Cost	₹90 lakh (assumed)	Not allowed
Taxable Capital Gain	₹60 lakh	₹1 crore
Tax Payable	₹12 lakh	₹12.5 lakh
Which is Better?	Better if indexation significantly reduces taxable gains	Better when inflation adjustment is small or property was acquired after 22 July 2024

Capital gains exemptions remain available

The change in tax rates does not affect exemptions available under the Income Tax Act. Eligible taxpayers may still claim relief under Section 54 by reinvesting the capital gains in another residential house, or under Section 54EC by investing in specified capital gains bonds, provided the prescribed conditions and timelines are met.

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Compare before filing your ITR

Tax professionals say property sellers should calculate their liability under both tax regimes before filing their income tax returns. While the new 12.5% rate may benefit many recent buyers, owners of properties purchased years ago may find that 20% tax with indexation produces a lower overall tax bill because inflation substantially increases the indexed cost of acquisition. The key takeaway is that a lower tax rate does not always mean lower taxes, making a side-by-side comparison essential before choosing the applicable regime.

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