The Union Budget 2024, effective from 23rd July 2024, introduced pivotal amendments to the taxation of Long Term Capital Gains (LTCG) arising from immovable property (land and buildings). These changes notably affect resident individuals and Hindu Undivided Families (HUFs) by revising tax rates, removing the applicability of the Cost Inflation Index (CII) for properties acquired post-cutoff, and instituting a grandfathering option for existing properties.
This guide offers a detailed examination of the legislative framework, interpretational insights, calculation methodology, and compliance checklist for Assessment Year 2025-26. Taxpayers, tax professionals, and chartered accountants will find this resource essential for optimized tax planning and compliant filing.
1. Legislative Amendments & Legal Framework
Pre-Amendment Position (Prior to 23.07.2024)
LTCG on immovable property was taxed at 20% with indexation under the Cost Inflation Index (CII), allowing adjustment of acquisition and improvement costs for inflation to tax only real gains.
Budget 2024 Amendments (Effective 23.07.2024)
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For immovable properties acquired on or after 23rd July 2024, the Cost Inflation Index will not apply.
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A concessional LTCG tax rate of 12.5% without indexation is introduced.
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Resident individuals and HUFs holding properties acquired before 23rd July 2024 may irrevocably elect to pay tax at:
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20% with indexation (old regime), or
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12.5% without indexation (new regime),
whichever is more beneficial.
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Applicability Limitations
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Grandfathering applies only to resident individuals and resident HUFs.
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Non-residents, companies, firms, trusts, and other entities will be taxed at 12.5% without indexation regardless of acquisition date, with no grandfathering.
2. Interpretation of Acquisition Date
Correctly determining the acquisition date is critical for applying grandfathering and the applicable tax regime.
The acquisition date is the earliest date when the taxpayer gains a legally enforceable right in the property, which could be:
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Booking or allotment date for under-construction properties.
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Date of possession or delivery of possession.
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Date of registration of sale deed or conveyance.
Note: Possession and right to use may precede registration; taxpayers should keep detailed, verifiable documents like allotment letters, possession certificates, payment receipts, and registered deeds.
3. Taxpayer Eligibility and Election of Tax Regime
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Only resident individuals and resident HUFs may irrevocably choose between:
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20% tax with indexation, or
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12.5% tax without indexation.
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This election must be made at the time of filing the Income Tax Return (ITR).
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Failure to disclose or incorrect disclosure can invite reassessment and penalties.
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Non-residents and other entities must pay 12.5% without indexation, with no election option.
4. Impact on LTCG Calculation & Strategic Tax Planning
| Parameter | Before 23.07.2024 (Resident Individual/HUF) | On or After 23.07.2024 (All Taxpayers) |
|---|---|---|
| Tax Rate | 20% (with CII indexation) | 12.5% (without CII indexation) |
| Cost Inflation Index | Applicable | Not applicable |
| Grandfathering Option | Yes, for resident individuals & HUFs | Not available |
| Taxpayers Eligible | Resident individuals & HUFs only | All taxpayers |
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Removal of indexation for acquisitions on or after 23.07.2024 results in higher taxable gains.
Indexation reduces taxable gains by adjusting acquisition/improvement costs for inflation.
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Grandfathering protects investments made before the cutoff but requires strategic regime selection at filing.
5. Numerical Illustrations
Example 1: Property acquired before 23.07.2024 by Resident Individual (Grandfathering Applicable)
| Calculation Component | With Indexation (20%) | Without Indexation (12.5%) |
|---|---|---|
| Cost of Acquisition | Cost × (CII of FY of sale / CII of FY of acquisition) | Cost of Acquisition (unindexed) |
| Cost of Improvement | Similar indexation applied | Cost of Improvement (unindexed) |
| Capital Gains | Sale Consideration - Indexed Costs | Sale Consideration - Unindexed Costs |
| Tax Rate | 20% | 12.5% |
| Tax Payable | Calculated accordingly | Calculated accordingly |
Example 2: Property acquired on or after 23.07.2024 by any taxpayer
Tax is 12.5% flat without indexation; no regime choice available.
6. Impact on Reinvestment Exemptions (Sections 54/54F)
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The removal of indexation for properties acquired post-23.07.2024 means the base cost cannot be adjusted for inflation, potentially increasing taxable capital gains and affecting exemption amounts under Sections 54 (residential property) and 54F (other capital assets).
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Taxpayers must carefully plan reinvestment timelines and amounts to maximize exemptions.
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Documentation to substantiate reinvestment claims remains critical.
7. Compliance Best Practices and Documentation
| Document / Action | Purpose | Retention Period | Notes |
|---|---|---|---|
| Allotment Letter / Booking Receipt | Proof of acquisition date | At least 6 years | Critical for determining acquisition date |
| Possession Certificate | Evidence of possession date | At least 6 years | May establish earlier acquisition |
| Registered Sale Deed | Legal proof of ownership and transfer | Permanent | Mandatory for ownership verification |
| Payment Receipts | Support cost of acquisition and improvements | At least 6 years | To substantiate costs |
| Capital Gain Computations | Support for tax calculations | At least 6 years | Prepare under both regimes |
| ITR Filing with Grandfathering Election | Compliance and regime declaration | At least 6 years | Keep acknowledgment and declaration |
| Proof of Reinvestment (Section 54/54F) | To claim capital gains exemptions | At least 6 years | Strict timelines and documentation required |
| Correspondence with Tax Authorities | For notice responses and clarifications | At least 6 years | Timely responses to avoid penalties |
8. Caution Points: Avoiding Defaults and Penalties
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Accurately determine and document the acquisition date; discrepancies may forfeit grandfathering benefits.
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Make irrevocable tax regime election clearly in ITR; omission risks reassessment.
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Non-residents and entities must not claim grandfathering, as it is legally disallowed.
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Misapplication of indexation or grandfathering provisions can result in excess tax payment and interest charges.
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Strategically plan timing of property transfers around 23.07.2024 for tax efficiency.
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Ensure strict compliance with reinvestment timelines for claiming exemptions.
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Maintain full documentation to withstand scrutiny.
9. Sample ITR Disclosure Format for Grandfathering Election
| Particulars | Details |
|---|---|
| Sale Consideration | ₹ (amount) |
| Cost of Acquisition (Indexed/Unindexed) | ₹ (amount per regime) |
| Cost of Improvement (Indexed/Unindexed) | ₹ (amount per regime) |
| Capital Gains | ₹ (calculated amount) |
| Tax Rate Applied | 20% with indexation / 12.5% without indexation (strike out whichever not applicable) |
| Date of Acquisition | DD/MM/YYYY |
| Grandfathering Election | Yes / No |
| Declaration | "I declare that the above information is true and the regime is selected as per Budget 2024 provisions." |
| Signature / PAN / Aadhaar Number |
10. Strategic Tax Planning Tips
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Assess tax liabilities under both regimes before filing for pre-23.07.2024 acquisitions.
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Consider timing of property sales and reinvestments to optimize tax impact.
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Retain all documents for at least six years post-assessment year.
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Engage professional tax advisors early, especially for complex or inherited properties.
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Monitor CBDT notifications or circulars for clarifications on practical implementation.
11. Frequently Asked Questions (FAQs)
Q1: Can a non-resident claim grandfathering by becoming resident later?
No, grandfathering applies only to resident individuals and HUFs at the time of filing for that assessment year.
Q2: What is the acquisition date in case of inherited property?
For inherited property, acquisition date is generally the date on which the original owner acquired the property.
Q3: Can the grandfathering option be changed once selected?
No, the election is irrevocable once made in the ITR.
Q4: What if a property was partly sold before 23.07.2024 and partly after?
Each transfer is treated separately; tax rates and grandfathering apply based on acquisition date and date of each transfer.
Q5: Is there any change in exemptions under Sections 54 and 54F?
No change in the provisions, but the removal of indexation may affect the taxable gains and hence the exempted amount.
