Surcharge Glitch Offsets Real Estate Capital Gains Benefits

The new 12.5% LTCG rule causes tax mismatch due to software's income calculation method

- Anil Poste

A change introduced by the government in 2024 to ease capital gains tax on real estate has inadvertently created a tax trap that could leave many individuals paying more than expected.

The government has allowed taxpayers to choose between a lower 12.5% tax rate on long-term capital gains (LTCG) without indexation or a 20% rate with indexation on gains from property sales.

This applies to properties sold on or after 23 July 2024. However, the concession does not extend to surcharge and cess calculations, often resulting in a higher overall tax burden.

This article explains the changes in LTCG taxation on real estate and what steps taxpayers can take to manage or reduce their liability.

Grandfathering benefit doesn't extend to surcharge

The Finance Bill 2024 introduced an optional lower tax rate, with retrospective effect, for individuals selling land or buildings.

"The Finance Bill 2024 changed the tax rate on long-term capital assets, being land or building for individuals and HUFs, from 20% to 12.5%. This change was brought with retrospective effect from properties which are sold on or after 23 July 2024," said Kinjal Bhuta, treasurer at Bombay Chartered Accountants Society.

To protect older buyers, the government introduced a "grandfathering" clause, allowing those who purchased property before the cut-off to choose whichever option—20% with indexation or 12.5% without—results in lower tax liability. However, this relief doesn't apply when calculating surcharge, which is based on total income, not the taxable income after indexation.