The Income Tax (I-T) Department regarding the acquisition cost of real estate purchased before 2001 marks a significant development for property owners in India. This move aims to streamline the calculation of long-term capital gains (LTCG) tax, an area that has undergone considerable scrutiny due to recent tax reforms. For properties acquired prior to April 1, 2001, taxpayers now have the option to select between the fair market value (FMV) as of that date or the actual cost of the property—provided that the FMV does not exceed the stamp duty value.
This shift is particularly relevant in the context of the financial year 2024-25 budget, which saw a reduction in the LTCG tax rate from 20% to 12.5%. While this reduction appears advantageous, it comes at the expense of eliminating indexation benefits for properties purchased after April 1, 2001. Indexation allowed taxpayers to adjust acquisition costs for inflation, thereby minimising taxable gains—a vital consideration in a country experiencing fluctuating property values. To illustrate this point, consider a property bought in 1990 for ₹5 lakh. By April 1, 2001, the stamp duty value had risen to ₹10 lakh, while the FMV was ₹12 lakh. If this property is sold after July 23, 2024, for ₹1 crore, the acquisition cost for tax purposes would be determined at ₹10 lakh, the lower of the two values. Consequently, the indexed cost of acquisition for the fiscal year would be ₹36.3 lakh, resulting in a substantial LTCG of ₹63.7 lakh and a tax liability of ₹12.74 lakh at the previous rate.
This new clarity offers taxpayers a critical opportunity to optimise their tax liabilities when selling long-held properties. By enabling the choice between FMV and actual cost, the I-T Department provides a powerful tool for strategic financial planning. This is especially pertinent for real estate in regions where market values have surged significantly since 2001. Moreover, this initiative aligns with broader governmental efforts aimed at simplifying tax regulations and enhancing transparency for taxpayers. As the real estate market continues to evolve, the emphasis on sustainability becomes increasingly vital. The ability to make informed financial decisions not only promotes economic stability for individuals but also encourages responsible property ownership, fostering a more sustainable approach to urban development.