Table of Contents
The reason: the switch to a 12.5% non-indexed LTCG tax, combined with a grandfathering rule that offered only limited relief for properties purchased before the cut-off date. The removal of indexation—the adjustment that previously allowed homeowners to factor in inflation and reduce net capital gains—creates hidden long-term implications for taxpayers.
While the grandfathering option may appear favourable, it comes with significant caveats. The relief applies only to tax calculation on the gains, not to the broader computation of gross total income. This means the full non-indexed gain is still added to total income, potentially pushing taxpayers into higher surcharge brackets. It also prevents the recognition of genuine long-term capital losses and restricts tax exemptions under Sections 54 and 54EC.
Ashish Karundia, founder of chartered accountancy firm Ashish Karundia & Co, points out that the grandfathering concession is narrow, as it reduces the tax rate but does not change the way capital gains interact with other provisions in the tax laws. “For homeowners, the long-term implications could be more significant than the immediate tax savings,” he said.
Why is it inflating your net income
While filing Income Tax Returns (ITR) this year, taxpayers who sold house property after 23 July 2024 noticed a pattern. The ITR utility calculates tax on property gains using the more favourable of the indexed or unindexed purchase price, but at the same time, it adds the entire unindexed gain to the gross total income.
According to Himank Singla, partner at S B H S & Associates, Chartered Accountants, this is being widely mistaken for a glitch. In reality, the utility is simply following the law. “The confusion arises because taxpayers wonder why the full capital gain, computed without indexation, is added to gross income even though tax is levied at the concessional rate. The reason is that the grandfathering relief was applied only to Section 112 that determines the tax rate, not to Section 48, which governs how capital gains must be calculated,” he said.
So, capital gains being calculated under Section 48 must be done without indexation for property sales made on or after 23 July 2024. Next, these gains are added to the gross total income. Finally, under Section 112, tax on house property capital gains is applied at the lower of 20% with indexation or 12.5% without indexation.
This creates a situation where the tax on property gains may be minimal or even zero, but the gross income remains inflated by the non-indexed amount. As a result, taxpayers can find themselves crossing surcharge thresholds, which apply once income exceeds ₹50 lakh.
“Unindexed capital gains from real estate are counted as part of total income to determine both the applicability and the rate of surcharge,” explains Karundia.
Let’s understand with an example. You purchased a house in August 2012 for ₹2 crore and sold it in August 2024 for ₹3.5 crore. With indexation, your purchase cost would be ₹3.63 crore, meaning a capital loss of ₹13 lakh and therefore no tax. Without indexation, however, your gain is ₹1.5 crore.
Under Section 112, you owe no tax on this sale. But under Section 48, the ₹1.5 crore gain is still added to your income. Say, you also earn a salary of ₹40 lakh, so your total income rises to ₹1.9 crore, pushing you into the 15% surcharge bracket. “Even though the property sale itself generated no tax liability, you will pay a surcharge on your salary income purely because of the way property gains are counted,” says Karundia.
Singla concurred and said, “For taxpayers, this results in an illusory benefit of a lower tax rate that quietly triggers a higher surcharge, affecting their final outgo.”
The same mechanism also impacts the tax rebate applicable to incomes up to ₹7 lakh (in the new regime). “If your unindexed property capital gains pushes your total income above the rebate threshold, the zero tax benefit is lost,” Singla added.
Impact on loss from property
Earlier, when property sellers could calculate LTCG using indexation, the adjustment even led to a capital loss. Such losses could be carried forward and set off against future capital gains under Section 74, offering relief to taxpayers. But this is no longer possible.
Following the same reasoning, with the removal of the indexation benefit for property sales on or after 23 July 2024, losses that would have arisen under the indexed calculation are now effectively nullified.
“Section 74 permits the carry forward of losses only if they are computed under Section 48. Since Section 48 now requires gains to be calculated without indexation, taxpayers can no longer claim relief for losses that would have existed under the indexed method,” explained Karundia.
In the earlier example, the ₹13 lakh loss, which resulted in zero tax, is now rendered a dead loss. Under the new rules, loss set-off is allowed only if the property is actually sold for less than its purchase price, a rare situation typically occurring only in distressed sales.
Claiming exemption can result in higher tax
This shift also impacts exemptions under Sections 54 and 54EC, which allow taxpayers to reduce tax on capital gains by reinvesting the proceeds in residential property or specified bonds.
Previously, these exemptions were calculated on indexed capital gains, meaning the reinvestment requirement corresponded to the inflation-adjusted gain.
With indexation removed, the capital gains are higher in nominal terms, forcing taxpayers to invest a larger amount to claim full exemption, said Karundia. “For long-term property holders, this can significantly increase the reinvestment burden.”
There is an additional practical implication for those using the Capital Gains Account Scheme (CGAS) to temporarily park the gains but later decide to withdraw and not reinvest them. Such taxpayers will not get the benefit of paying lower tax of 20% with indexation or 12.5% without indexation because the tax utility is calculating tax at the flat rate of 12.5% without indexation.
“While this is incorrect and deviates from the law, the reality is that the utility applies tax on the entire sum withdrawn from the CGAS account,” Karundia says.
For example, you earned ₹50 lakh in capital gains, which would amount to only ₹10 lakh after indexation. You plan to reinvest in another property to claim exemption under Section 54 and deposit the ₹50 lakh in a CGAS account. If next year you decide not to buy a house and withdraw the amount, you will have to pay 12.5% tax on ₹50 lakh, i.e., ₹6.25 lakh. Had you paid 20% tax on the indexed ₹10 lakh gains that same year, your liability would have been ₹2 lakh.
“I would advise taxpayers to pay the lower tax in the same year. Of course, if you have finalised a property to reinvest gains, proceed with the transaction. But if there’s uncertainty about reinvestment, avoid parking the gains in CGAS and pay the tax upfront,” said Karundia.
Taken together, the new capital gains regime of 12.5% non-indexed rate affects loss on house property, exemption calculations, and reinvestment strategies, increasing the long-term financial implications of property transactions.
