Understanding the Impact of Surcharge on Property Sales: Insights from Dr. Suresh Surana

The recent changes in income tax law have raised important concerns for property sellers in India, especially regarding the taxation of long-term capital gains (LTCG). Chartered Accountant Dr. Suresh Surana has shed light on a particularly troubling aspect: even if a taxpayer does not realize any long-term capital gains from the sale of their property, they are still liable to pay income tax.

Key Takeaways from the Income Tax Law Shift

TaxBuddy.com highlighted this issue on August 22, 2025, showcasing an example of a taxpayer named Ramesh, who paid an additional ₹61,630 in taxes even though he realized ₹0 in gains from his property sale. This situation stems from the revised taxation structure outlined in the Finance (No. 2) Act, 2024.

Changes Introduced by the Finance (No. 2) Act, 2024

According to Dr. Surana, effective from July 23, 2024, a crucial amendment in the income tax provisions means that indexation of costs when computing LTCG is no longer permitted. Here’s what you need to know:

1. No Inflation Adjustment: Under the new law, the capital gain is computed as the difference between the sale price and the original cost, without accounting for inflation.

2. Revised Tax Rate: The applicable tax rate under Section 112 has been adjusted to 12.5%.

3. Grandfathering Relief: For properties acquired before July 23, 2024, a grandfathering provision allows taxpayers to opt for the lower tax calculation between the old regime (20% with indexation) and the new (12.5% without indexation).

However, it is essential to note that the grandfathering relief only applies at the tax computation stage. All gains must still be included in “total income” under Section 48, even if they do not incur any additional tax dues.

The Significance of Total Income and Surcharge

One fundamental distinction lies in how “total income” is defined. Total income, which includes the non-indexed capital gains, could push taxpayers into higher surcharge brackets when they breach specified thresholds like ₹50 lakh or ₹1 crore, affecting their tax liability significantly.

For instance, if tax calculation seemingly shows no additional capital gains tax due to the grandfathering provision, the full gain still impacts the individual’s total income and can lead to a higher surcharge.

Case Study: The Impact of Surcharge on Property Sales

To illustrate this point, let’s examine a case study presented by TaxBuddy:

• Buyer Profile: A resident individual purchased a property on January 1, 2014, for ₹1.30 crore and sold it later for ₹2 crore.

• Other Income: The taxpayer had additional income of ₹30 lakh (from bank interest and salary).

• Cumulative Index Number (CII):

  • 2013-14 = 220
  • 2024-25 = 363

Income Rules and Calculations

From July 23, 2024, all long-term capital gains on property are calculated without indexation. Here’s how it unfolds:

• Original Acquisition Cost: ₹1.30 crore
• Sale Consideration: ₹2 crore
• Non-indexed LTCG: ₹70 lakh
• Indexed Cost: ₹2.145 crore
• Tax Computed with the Lower Rate (12.5% without indexation): ₹8.75 lakh

Even though the calculation led to zero taxable capital gains, the entire non-indexed gain was considered as part of total income.

Tax Implications

• Total Income Post Sale: ₹1 crore
• Basic Slab Tax of ₹5.9 lakh
• 10% Surcharge Triggered: ₹59,000

In this scenario, the total income increased from ₹30 lakh to ₹1 crore due to the non-indexed capital gain, thus applying a surcharge, culminating in an additional tax burden of ₹61,360.

Key Takeaways

1. Understanding Surcharge: Just because no tax is payable on capital gains does not mean taxpayers are free from tax repercussions. Higher “total income” can invite a surcharge.

2. Equity in Property Sales: The date of property transfer plays a crucial role in determining tax liabilities.

3. Planning is Key: Taxpayers must strategize transaction timings and understand the impact on total income to avoid unexpected tax liabilities.

In summary, it’s vital for taxpayers to be acutely aware of how the changes to the income tax law impact their financial obligations, particularly regarding property sales. Seeking guidance from tax professionals like Dr. Suresh Surana will ensure individuals are well-informed and prepared for any potential tax liabilities resulting from their property transactions.

Stay Informed: The Importance of Tax Planning

For those involved in real estate transactions, understanding these recent changes is crucial for effective tax planning. By consulting with financial advisors and staying updated on tax law amendments, taxpayers can protect themselves from unintended financial consequences.