Clarifying Acquisition Cost for Real Estate Properties Purchased Before 2001 for LTCG Calculations
The IT department has clarified the cost of acquisition of real estate properties purchased before 2001 for Long-Term Capital Gains (LTCG) tax calculations.
Real EstateLong Term Capital GainsLtcg TaxIncome Tax DepartmentFair Market ValueReal Estate NewsJul 26, 2024
According to the IT department, the cost of acquisition of real estate properties purchased before 2001 will be the fair market value (FMV) as of April 1, 2001, or the actual cost of the land or building. This clarification is significant, especially after the FY25 Budget reduced LTCG tax on real estate to 12.5 percent, down from 20 percent previously.
However, the benefit of indexation was done away with for properties purchased after April 2001. Indexation allowed taxpayers to compute gains arising out of the sale of capital assets after adjusting for inflation.
For properties purchased before 2001, fair market valuation (not exceeding the stamp duty value) can be used as a base to determine the indexed price. The indexed price will then be reduced from the sale price for calculating LTCG, which will be taxed at 20 percent.
The IT department explained that an issue has been raised about what would be the cost of acquisition as of April 1, 2001, for properties purchased prior to 2001. It clarified that for properties (land or building or both) purchased prior to April 1, 2001, the cost of acquisition as of April 1, 2001, shall be the cost of acquisition of the asset to the assessee; or the fair market value (not exceeding the stamp duty value, wherever available) of such asset as of April 1, 2001.
Taxpayers can choose either option. The IT department provided an example to illustrate how capital gains tax would be calculated in case of properties purchased prior to 2001. It cited the example of a property whose cost of acquisition in 1990 was Rs 5 lakh and as on April 1, 2001, its stamp duty value was Rs 10 lakh, and the FMV was Rs 12 lakh.
If this property is sold on or after July 23, 2024, at Rs 1 crore, the cost of acquisition as of April 1, 2001, would be Rs 10 lakh (lower of stamp duty or FMV). The indexed cost of acquisition in the 2024-25 fiscal year is Rs 36.3 lakh (Rs 10 lakh 363/100). 363 is the cost inflation index for FY25 notified by the IT department.
The LTCG in such cases is Rs 63.7 lakh (Rs 1 crore minus Rs 36.3 lakh). At a tax rate of 20 percent, the LTCG tax for such properties would be Rs 12.74 lakh.
Frequently Asked Questions
What is the cost of acquisition of real estate properties purchased before 2001?
The cost of acquisition of real estate properties purchased before 2001 will be the fair market value (FMV) as of April 1, 2001, or the actual cost of the land or building.
What is the benefit of indexation?
Indexation allows taxpayers to compute gains arising out of the sale of capital assets after adjusting for inflation.
What is the LTCG tax rate on real estate properties purchased before 2001?
The LTCG tax rate on real estate properties purchased before 2001 is 20 percent.
How is the indexed cost of acquisition calculated?
The indexed cost of acquisition is calculated by multiplying the cost of acquisition as of April 1, 2001, with the cost inflation index for the relevant fiscal year.
Can taxpayers choose between the cost of acquisition and fair market value?
Yes, taxpayers can choose between the cost of acquisition and fair market value for calculating LTCG tax.
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