Long-term capital gains tax: The Centre announced on Tuesday a significant decision that offers relief to homeowners regarding Long-Term Capital Gains (LTCG) tax on real estate. Homeowners will now given the option to choose between two tax rates: a 20% rate with the indexation benefit, or a 12.5% rate without indexation.
This policy shift follows Finance Minister Nirmala Sitharaman’s announcement on July 23, 2024, to reduce the LTCG tax rate from 20% to 12.5%, accompanied by the removal of the indexation benefit. The indexation benefit, which previously allowed for the adjustment of the property’s purchase price based on inflation, no longer applies. This alteration was anticipated to result in a higher tax burden for numerous property owners.
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The amendment, which sought to eliminate the indexation benefits and reduce the LTCG tax rate to 12.5%, was introduced in response to concerns raised by the real estate sector regarding the initial proposal outlined in the Budget 2024.
As per the Finance (No. 2) Bill, 2024 introduced in the Lok Sabha, “Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before 23rd day of July 2024, where the income tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No.2) Act. 2024, such excess shall be ignored.”
How will the new rule impact your tax outgo?
12.5% Long-Term Capital Gains rate without indexation: This option entails taxpayers paying a reduced tax rate of 12.5% on the capital gains generated from the sale of property without accounting for inflation through indexation.
20% Long-Term Capital Gains (LTCG) rate with indexation: This conventional alternative mandates taxpayers paying a higher tax rate of 20%. However, they have the liberty to adjust the property’s purchase price for inflation by utilizing the Cost Inflation Index (CII) furnished by the Central Board of Direct Taxes. This adjustment has the potential to substantially diminish the taxable capital gains and, consequently, the overall tax liability.
Points to note
> The recent change in tax regulations specifically affects capital gains derived from property sales.
> Taxpayers are not granted the option to select the tax regimes. The determination of the relevant tax liability will be made by the government, utilising calculated figures. Should the application of the Old tax Regime lead to a negative financial outcome, taxpayers are barred from offsetting this loss under the New Tax Regime.
> The primary objective of the government’s decision is to strike a balance between ensuring sufficient tax revenue and addressing taxpayers’ apprehensions regarding the elimination of indexation benefits.
“The Indian government’s decision to allow taxpayers to choose between a 12.5% tax rate without indexation or a 20% rate with indexation on long-term real estate transactions (acquired before July 23, 2024) is a significant development. This move offers flexibility for sellers, who can now choose the option that best suits their financial situation and the extent of their property’s appreciation. While the 12.5% rate may seem immediately attractive, the decision to opt for it or the 20% rate with indexation should be made after careful consideration of individual circumstances. Ideally, if a property’s value has significantly outpaced inflation, the 12.5% rate might be more beneficial. However, indexation could be advantageous in cases where property appreciation is closer to the inflation rate. This amendment is expected to stimulate investment and sales in the housing market by potentially reducing the tax burden on sellers. It reflects a progressive approach by the finance minister to encourage growth in the real estate sector,” said Shishir Baijal, Chairman and Managing Director, Knight Frank India.
“The proposed change, which offers a choice between a 12.5% tax rate without indexation and a 20% tax rate with indexation, provides homeowners with the best of both the worlds. This flexibility effectively serves as a grandfathering provision for all property transactions completed before the budget’s presentation in Parliament on July 23. It will eliminate concerns over increasing project costs due to the LTCG amendments on budget day and further boost the growth of the affordable housing sector over the next fiscal year,” said Rishi Anand, MD & CEO at Aadhar Housing Finance Limited.
” 23rd July 2024 shall be taken as a cut off date and in a way, properties (primarily immovable assets like land and building) purchased before this date shall have grandfathering benefits. If you have bought your property before this date, you are eligible to take benefit and choose, from both the old and new tax regime, either 12.5% without indexation or 20% with indexation, whichever is more beneficial to the assesee. Therefore, this gives a shield of limiting your capital gains tax liability coming under your old one with indexation, if your tax liability under the new rate without indexation is coming out to be more,” said Ritika Nayyar, Partner, Singhania & Co.
“In an ideal scenario, if the property’s value has increased more than the inflation rate, the new 12.5% tax rate is expected to be more advantageous for real estate sellers compared to the previous 20% tax rate after adjusting for indexation,” said Vivek Rathi, National Director-Research, Knight Frank India.
“The new LTCG tax regime although comes without indexation benefits but can be of significant benefits, subject to the appreciation at the point of selling the property. The concern pertaining to higher LTCG tax liability on property sales had raised a sense of anxiety among the investors, especially for the properties that were acquired before the prescribed date. The provision of this choice is a landmark development towards keeping the taxpayers’ and investors’ sentiment at the epicentre and will give a major boost to investments in the real estate sector across housing segments. Additionally, the rollover benefits remain intact which means that if capital gains are invested, deductions under Sections 54, 54F and 54EC for buying or constructing residential real estate up to specified limits, LTCG would continue to be exempt from tax,” said Nitin Bavisi, CFO, Ajmera Realty & Infra India Ltd.
“The government’s revised budget announcement allows taxpayers to pick between a 12.5% Long-Term Capital Gains (LTCG) tax rate without indexation and a 20% rate with indexation, for properties purchased before July 23, 2024. This will have a very profound impact on both homeowners and aspiring homebuyers,” said Anuj Puri, Chairman – ANAROCK Group.
Puri elaborates on the rule for different categories:
Homeowners: This change gives homeowners flexibility in their tax liabilities when they sell their property. For properties held over a long period, where inflation has majorly raised the property’s value, opting for the 20% tax rate with indexation would be beneficial. Indexation adjusts the purchase price for inflation, potentially reducing the taxable gain and overall tax liability. For properties held for shorter periods or in low-inflation periods, the 12.5% rate sans indexation could be more beneficial and result in a lower tax burden.
Homebuyers: This revision can potentially stimulate the residential property market because it provides clarity and implies potential tax burden reduction. Homebuyers’ sentiment will improve as they have flexible options for addressing their future capital gains tax burden. This will result in higher demand, particularly in markets where property values have been seen to rise significantly.
“As per ANAROCK Research, H1 2024 saw total sales of nearly 2.51 lakh units across the top 7 cities, 9% more than the same period last year (H1 2023). Given that Q2 2024 saw sales tapering due to the election heat and the increased prices across cities, the new tax imposed by the government in the budget was considered a dealbreaker for many. Now, with the government giving these options to the homebuyers, housing sales momentum will continue unimpeded,” Puri added.
“It would be pertinent to note that this revised proposal only provides taxpayers relief on account of any extra tax burden which may arise pursuant to the proposed regime. It does not provide an option to the taxpayer to compute capital gains tax liability under the old or the new regime. Consequently, if computing capital gains under the old regime results in a loss, the taxpayer would not be allowed to recognise the same in its returns,” said Kunal Savani, Partner, Cyril Amarchand Mangaldas.