PROSPERR.IO

The Indian Income Tax Act offers significant relief to taxpayers through Section 54, which exempts long-term capital gains on the sale of a residential property if the proceeds are reinvested in another residential house. However, with a critical amendment to Section 48 which has came into effect from 23rd July 2024, this benefit may not be as lucrative as before — especially when it comes to Cost Inflation Index (CII).

Let us assess how this impacts tax planning.

🔍 The Key Change: What Has Been Amended?

✅ Before 23rd July 2024:

Under Section 48, while computing long-term capital gains (LTCG), the indexed cost of acquisition and indexed cost of improvement was allowed. This indexation benefit helped taxpayers adjust their purchase price with inflation, thereby reducing the taxable capital gain significantly.

🚫 On or After 23rd July 2024:

As per the amended Section 48, indexation benefit is no longer available for residential properties sold on or after 23rd July 2024. Taxpayers must now compute LTCG without adjusting the cost of acquisition or the cost of improvement for inflation.

🧮 Section 54: Exemption Still Available, But With a Catch:

Section 54 remains unchanged, which means if you reinvest the capital gains into one residential house or in cases where capital gain is upto ₹2 crores in two (once in life time) residential houses in India, you can still claim full or partial exemption.However, Because the capital gain will now be higher (due to withdrawal of indexation benefit), the investment required to claim full exemption will also be higher.

📊 Illustrative Examples:

🔵 Example 1: Residential House Sold Before 23rd July 2024):

• Purchase Price (FY 2004–05): ₹50 lakhs
• Sale Price (FY 2024–25): ₹2.5 crores (sold on 1st July 2024)
• CII for FY 2004–05: 113
• CII for FY 2024–25: 363
• Indexed Cost of Acquisition = ₹50 lakhs × (363 / 113) = ₹1.607 crores (approx.)
• Taxable Long-Term Capital Gain (LTCG) = ₹2.5 crores – ₹1.607 crores = ₹89.3 lakhs (approx.)

🟢 If the taxpayer reinvests ₹89.3 lakhs or more into a new residential property (or 2 properties, subject to Section 54 conditions), the entire capital gain will be exempt under Section 54.

🔴 Example 2: Same Property Sold in FY 2025–26):

• Purchase Price (FY 2004–05): ₹50 lakhs
• Sale Price (FY 2025–26): ₹2.5 crores (sold on 1st August 2025)
• CII (2004–05): 113
• CII (2025–26): 376

❌ Indexation benefit is not available under amended Section 48 for sales on or after 23/07/2024

Taxable LTCG = ₹2.5 crores – ₹50 lakhs = ₹2 crores

🟥 To claim full exemption under Section 54, the taxpayer is now required to invest ₹2 crores (instead of ₹89.3 lakhs lakhs earlier). This illustrates a more than 100% increase in required reinvestment due to disallowance of indexation.

📌 Key Implications (w.e.f. 23/07/2024):

1. Exemption Still Available:

Section 54 continues to allow full or partial exemption from LTCG tax, if the proceeds are reinvested in one (or two) residential houses in India within the specified timelines.

2. Indexation Removed — But Not Always Higher Tax:

While indexation benefit is no longer available under amended Section 48, resident Individuals and HUFs are still protected by Section 112. In case tax at 20% on indexed gains is lower than tax at 12.5% on non-indexed gains, the taxpayer will not be taxed at the higher amount. So, withdrawal of indexation does not always result in higher tax liability — but it can increase the reinvestment burden for Section 54 relief.

3. ₹10 Crore Cap Still Applies:

Exemption is restricted if the cost of the new house exceeds ₹10 crores. Any investment above that amount will not be considered for Section 54 exemption.

Conclusion:

With the amendment to Section 48 effective from 23rd July 2024, the indexation benefit is no longer available in computing long-term capital gains on the sale of residential property. While this leads to higher nominal gains, especially for properties held over the long term, residents Individuals and HUFs remain protected under Section 112, which ensures that the tax payable will not exceed what it would have been under the old indexed regime.

However, for those claiming exemption under Section 54, the higher unindexed gain increases the reinvestment amount required to fully shield the gain from tax. In FY 2025–26 and beyond, understanding the interplay between these provisions is crucial for effective tax planning and compliance. Taxpayers are advised to evaluate their position carefully and consult professionals when planning to sell residential property under the new regime.

Prosperr.io is a simple platform to manage your personal income tax. It helps you save and automates tax tasks. It gives you the knowledge to make smart financial choices, keeping your money where it belongs. Click here to book your FREE tax assessment call

Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. Readers are advised to consult with a qualified tax advisor or legal professional for specific advice tailored to their individual circumstances, particularly regarding reassessment proceedings and claiming refunds. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the content of this article.