Compute Tax at 12.5% Without Indexation or 20% With Indexation on Realty Transactions: Govt Proposes Amendment

The government has proposed an amendment offering taxpayers a choice between a 12.5% long-term capital gains (LTCG) tax rate without indexation or a 20% rate with indexation for properties acquired before July 23, 2024. This follows Budget 2024’s controversial proposal to remove indexation benefits. The Income Tax department has described this development as advantageous despite concerns from stakeholders.

In a significant move to provide relief to the real estate industry, Finance Minister Nirmala Sitharaman announced an amendment to the Finance Bill. This amendment will allow taxpayers to select either a 12.5% LTCG rate without indexation or a 20% rate with indexation for properties acquired before July 23, 2024.

Amendment Details

As per the amendments to the Finance Bill, 2024, which were circulated to Lok Sabha members, individuals or Hindu Undivided Families (HUF) who purchased houses before July 23, 2024, can now compute their taxes under the new scheme (12.5% without indexation) or the old scheme (20% with indexation) and pay the lower of the two.

This development comes in response to backlash from the real estate sector, which had warned that the removal of indexation benefits proposed in Budget 2024 would negatively impact the sector’s growth. The stakeholders had cautioned the Centre that eliminating indexation could hurt the real estate market.

Indexation Rule in Budget 2024

In the Union Budget presented by Finance Minister Sitharaman, it was proposed to reduce the LTCG tax on property to 12.5% from 20%, while removing the benefit of indexation for properties purchased on or after April 1, 2001. Indexation allows taxpayers to adjust the acquisition cost for inflation before computing capital gains, thus reducing the overall tax liability. The Central Board of Direct Taxes notifies a Cost Inflation Index (CII) for this computation.

Stakeholder Concerns

Previously, indexation benefits allowed homeowners to increase the property’s cost basis to account for inflation, thereby reducing the net profit and the associated tax liability. The removal of these benefits was met with significant concern from the real estate sector.

Reports indicated that a higher tax rate with indexation or a lower rate of 12.5% without indexation, as well as some form of grandfathering for ancestral properties, were proposed. These suggestions were being examined by the finance ministry and discussed with the Prime Minister’s Office.

Government Discussions

The finance ministry conducted discussions on the concerns raised by various stakeholders, including the potential rise in black money transactions due to the proposed changes. These discussions highlighted the complexities and potential unintended consequences of the new tax regime.

Legislative Process

The Lok Sabha has begun discussions on the Finance Bill following the passage of the Appropriation Bill for the central government’s expenditure for 2024-25. The passage of the Finance Bill by Parliament will complete the budget process.

Conclusion

The proposed amendment to the Finance Bill 2024 provides a significant choice for taxpayers regarding the taxation of realty transactions. By allowing a choice between a 12.5% LTCG rate without indexation and a 20% rate with indexation, the government aims to address the concerns raised by the real estate sector and provide a fair taxation framework for properties acquired before July 23, 2024. This development highlights the government’s responsiveness to stakeholder feedback and its commitment to ensuring a balanced approach to tax policy in the real estate market.

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