When Finance Minister Nirmala Sitharaman announced the Union Budget 2024 on July 23, one of the biggest takeaways was the proposal to lower the long-term capital gains (LTCG) from 20 per cent to 12.5 per cent and remove indexation benefits.
The move had attracted a mixed bag of reactions, with many arguing that the move would hinder the growth of the real estate sector.
Now, almost 15 days later, the government has made changes to the budget proposal, aimed at providing relief to property owners.
What are the changes proposed and how will it benefit those in the real estate sector? We take a look.
What are the new changes?
Finance Minister Nirmala Sitharaman will move an amendment in the Finance Bill to give taxpayers the option to choose between two tax rates for long-term capital gains (LTCG) tax on property purchases.
The government has decided to offer a choice to taxpayers in cases of the sale of property acquired before July 23, 2024 — pay the LTCG tax at the rate of 20 per cent with indexation benefit (the old scheme), or pay the 12.5 per cent without indexation benefit (new scheme).
“In the case of transfer of a long-term capital asset, being land or building or both, by an individual or HuF (Hindu Undivided Family), which is acquired before the 23rd day of July 2024, the taxpayer can compute his taxes under the new scheme and the old scheme and pay such tax which is lower of the two,” a person familiar with the matter said.
For those who need a quick recap,
indexation is the method to adjust the original purchase price of an asset in order to reduce the impact of inflation on it. The indexation benefit helped property sellers in India by lowering their tax burden on the profit they make from selling their assets, making real estate a more attractive investment option.
In the recently announced Union Budget by Finance Minister, Nirmala Sitharaman, it was proposed to reduce the LTCG tax on property sales from 20 per cent 12.5 per cent, while removing the benefit of indexation for properties purchased on or after April 1, 2001.
Why the change now?
The choice of two schemes is a significant reversal from the government’s previous stance on the matter. At the time, Finance Secretary TV Somanathan, defending the government’s move said that 12.5 per cent without indexation benefit is “higher” than 20 per cent with indexation. “In 95 per cent cases, this 12.5 per cent will benefit. Due to this change, the middle class will benefit,” he said.
Even Revenue Secretary Sanjay Malhotra had defended the proposal to remove indexation benefits from LTCG on real estate citing that other asset classes, including incomes from shares, interest and fixed deposits do not enjoy the same benefit, and the move should be seen as a simplification measure.
However, many in the real estate sector, as well as within the Bharatiya Janata Party (BJP) and its allies had argued otherwise. They stated that by removing the indexation benefit, the middle class — the party’s core base support — would be negatively impacted.
Some within the BJP, as per a Moneycontrol report, had complained that the removal of the indexation benefit appeared as if the government was not doing enough for the middle class.
Even industry insiders had observed that the Budget’s proposal to remove indexation would hurt the sector. PropEquity Founder and CEO Samir Jasuja had noted that the removal of indexation benefit on the sale of a property can hinder the growth of the real estate sector and slow down the vision of achieving $1 trillion real estate economy.
Several MPs had also urged the government to rethink its initial proposal. As per The Hindu, TDP MP Lavu Sri Krishna Devarayalu said the middle-class people were affected. “So, I think, there should be a relook at this indexation because middle-class people think that real estate is one thing that they can safely invest in. We feel that it should be protected. I hope that the finance minister will listen to this,” he said.
There were also concerns that the removal of the indexation benefit would increase the use of cash in property sales, as sellers would be tempted to deflate the actual transaction value on paper in order to pay less tax. This, in turn, could fuel black money back into the real estate sector.
How will the change benefit homeowners?
The government’s decision to introduce the two schemes — pay the LTCG tax at the rate of 20 per cent with indexation benefit or pay the 12.5 per cent without indexation benefit — will permit for more flexibility for homeowners.
It would also quell some of the concerns that homeowners have around losing indexation benefits as a trade-off for a lower long term capital gains tax rate. Gouri Puri, partner at Shardul Amarchand Mangaldas & Co told news agency PTI: “This will quell taxpayer concerns around losing indexation benefits as a trade-off for a 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 a change in the law have been addressed.”
Yogesh Kale, executive director, Nangia Andersen India also shared a similar opinion. “Through the amendments proposed to the new capital gain tax regime introduced in the budget, the Centre has tried to appease the taxpayers by addressing the concerns raised to some extent. While abolishment of indexation benefit continues, properties acquired prior to July 23, 2024, are proposed to be grandfathered with taxpayers getting an option to offer the capital gain tax under the tax rate that is more beneficial for them,” he said to The Hindu.
Sudhir Kapadia, a senior advisor at Ernst & Young, explained it best. The government’s move “gives the best of both worlds”. “With this proposed change to the original Finance Bill, the government has clearly heeded the legitimate concerns of many taxpayers. Without indexation, the tax outgo could have been higher for those selling older properties,” he was quoted as saying to Business Standard.
With inputs from agencies
Link to article –
Centre modifies rule on capital gains tax on real estate: Why this is a relief for homeowners
