IT Department Explains LTCG Calculation for Pre-2001 Properties

The I-T Department clarifies LTCG tax calculations for properties purchased before 2001, detailing how to determine cost and apply the reduced tax rate.

Clarification on Cost of Acquisition

On July 26, the Income Tax Department issued a clarification regarding the calculation of long-term capital gains (LTCG) tax for real estate properties purchased before 2001. According to the I-T department, the cost of acquisition for these properties will be determined by either the fair market value (FMV) as of April 1, 2001, or the actual cost of the property—whichever is lower—without exceeding the stamp duty value. This FMV will serve as the base for calculating LTCG on property sales.

Changes in LTCG Tax Rate

In the Fiscal Year 2025 budget, the government reduced the LTCG tax rate on real estate from 20% to 12.5%. However, this adjustment comes with a catch: the indexation benefit, which allowed taxpayers to account for inflation when calculating gains, will no longer apply to properties acquired after April 2001. For properties bought before 2001, taxpayers can still use FMV (not exceeding stamp duty value) as a base to compute the indexed price. The indexed price will be subtracted from the sale price to determine the LTCG, which will be taxed at 20%.

Example of LTCG Calculation

The I-T Department provided an illustrative example for understanding LTCG calculations on properties acquired before 2001. Consider a property bought in 1990 for Rs 5 lakh, with a stamp duty value of Rs 10 lakh and an FMV of Rs 12 lakh as of April 1, 2001. If the property is sold for Rs 1 crore on or after July 23, 2024, the cost of acquisition for tax purposes would be Rs 10 lakh—the lesser of the stamp duty value or FMV. For the fiscal year 2024-25, the indexed cost of acquisition will be Rs 36.3 lakh (calculated as Rs 10 lakh multiplied by the cost inflation index of 363/100, as notified by the I-T department).

Final Tax Computation

The LTCG in this scenario would be Rs 63.7 lakh (as per the old regime), calculated by subtracting the indexed acquisition cost of Rs 36.3 lakh from the sale price of Rs 1 crore. The applicable LTCG tax, at a rate of 20% (as per the old regime), would amount to Rs 12.74 lakh. While LTCG tax, at the rate of 12.5% (as per the new regime), would amount to Rs 11.25 lakhs, on LTCG of Rs 90 lakh (1 crore – 10 lakh). The department reiterated that taxpayers can opt for either the actual acquisition cost or the FMV as of April 1, 2001, based on which is more beneficial for their tax calculations.