In a major relief to homeowners who bought properties before July 23, 2024, the government has proposed an amendment to the long-term capital gains (LTCG) tax giving them an option to choose between the lower tax rate of 12.5% without indexation or a higher rate of 20% with indexation of properties acquired before July this year. Real estate and tax experts have welcomed the government’s decision to ease the long-term capital gains tax for sale of properties proposed in the Union budget 2024.
As per the amendments to Finance Bill, 2024, circulated to the Lok Sabha members, an individual or HUF buying houses before July 23, 2024, can compute his taxes under the new scheme of 12.5% without indexation and the old scheme of 20% with indexation and pay such tax which is lower of the two, a PTI report said.
Hemal Mehta, partner, Deloitte India said that the amendment related to tax on the long-term capital gains tax on immovable properties is a welcome move. “Now a resident taxpayer can opt for a tax rate which is more beneficial for properties acquired prior to July 23. This gives relief to taxpayers who can also opt for exemption under section 54 to compute and invest the long term capital gain in another residential unit.”
“This move shall provide much-needed relief to taxpayers as the same shall assuage any situation wherein the taxpayer would need to pay higher taxes even though on an indexed basis there is no real gain to the taxpayer,” Gaurav Karnik, Partner and Real estate National Leader, EY India, said.
Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co said that this will quell taxpayer concerns around losing indexation benefits as a trade off for lower long term capital gains tax rate. Taxpayers can choose the more beneficial regime and should not be worse off because of change in law. Concerns around taxation of inflationary gains in respect of immovable property acquired prior to change in law have been addressed.
Vivek Jalan, Partner, Tax Connect Advisory said, “Retrospective tax creates an uncertain environment that disrupts the financial position of a taxpayer. LTCG taxation for real estate had a great benefit of inflation adjusted indexation wherein in case you would sell a long term capital asset, say property, then the LTCG would be 20% after taking the benefit of indexed cost of acquisition and improvement.”
“After 23rd July 2024, i.e. the day when the Union Budget was announced, even for old properties, indexation was removed with a logic of ease of computation and the rate of LTCG without indexation has also been increased from 10% to 12.5%,” he added.
As per the report, in case of the transfer of a long-term capital asset being land or building or both either by an individual or Hindu undivided family, acquired before the July 23, 2024, the taxpayer can compute his taxes under the new scheme [12.5% without indexation] and old scheme [20% with indexation] and pay such tax which is lower of the two.
“This would certainly impact property sellers, especially those who had bought properties before 23rd July 2024 with a tax planning, and consequently the real estate industry, which is a big employment generator in the economy. would be hit hard. Now the government may make this change prospective for properties purchased after July 23, 2024. This will provide a much awaited relief for property owners,” Jalan said.
Niranjan Hiranandani, chairman of the Hiranandani Group and NAREDCO, said, “The government’s initiative to allow taxpayers the option to compute taxes either at 12.5% without indexation or at 20% with indexation on real estate transactions is a significant step forward.”
“This relief applies to the transfer of long-term capital assets, such as land or buildings, acquired before July 23, 2024. By enabling taxpayers to choose the lower tax burden between the new and old schemes, the amendment is poised to drive investment and enhance sales across housing segments,” he added.
Budget 2024 proposal on LTCG tax
Finance minister Nirmala Sitharaman in her budget speech had announced a hike in both long-term as well as short-term capital gains tax. The Centre had also proposed to do away with the indexation benefit for sale of property, which allowed property owners to adjust their gains for inflation.
The government is looking at several options to address concerns from the real estate sector, as representations pour in at North Block regarding the recent Budget announcement on indexation removal, a report by CNBCTV18 had said earlier.
In the Budget 2024, the FM announced the withdrawal of indexation benefits from real estate and lowered the long-term capital gains (LTCG) tax from 20% to 12.5%. Union Finance Minister Nirmala Sitharaman on July 24 had proposed to do away with the indexation benefit on sale of property, that allowed home owners the benefit of adjusting their gains against inflation. This, said real estate experts, may lead to higher tax burden on real estate transactions and severely impact property sellers.
Also Read: Budget 2024: How removing indexation benefits for capital gains tax on property may impact the Mumbai real estate market
The long-term capital gains (LTCG) had been reduced from 20% with indexation benefit to 12.5% without indexation for the real estate sector.
Also Read: Budget 2024: Removal of indexation benefit may lead to higher tax burden
Removal of indexation benefits and the subsequent reduction in profitability from real estate transactions may lead to investors shying away from assets that are taxed at a higher rate. The removal of the indexation benefit is largely negative for all those planning to sell their old properties, experts had said on July 24.
Also Read: Budget 2024: Planning to sell a property bought after 2001? Here are 7 things that you should know
The removal of indexation from the calculation of capital gains tax on property sales can have significant implications for sellers, depending on when the property was acquired, tax experts had said then.
“Indexation allows for the adjustment of the purchase cost of an asset for inflation over the period of ownership, effectively reducing the capital gain and the associated tax liability upon sale. Without indexation, the original purchase cost is used, leading to a potentially higher capital gain and increased tax burden,” tax experts had said.
