LTCG Tax Relief for Property Owners! How Can You Still Get Indexation Benefit On Property Sale

Good news for home buyers! Those concerned about the removal of indexation benefits on the sale of property can now take a sigh of relief. The government has amended its Budget 2024 announcements related to indexation and lowering of long-term capital gains (LTCG) tax.

Following the nationwide call of concerns from property owners and industry alike, the government has moved an amendment that now allows LTCG on property purchases made before July 23, 2024, to be calculated under the new 12.5 per cent rate without indexation and the old 20 per cent rate with indexation.

Also Read: Government Exploring Options To Address Indexation Concerns In The Real Estate Sector

Now, the decision is with taxpayers to choose the most favourable option in both cases for property bought before July 23, 2024. The said change will be included in the Finance Bill which was tabled in the Lok Sabha on August 6.

Says Abhishek Raj, Founder & CEO of Jenika Ventures, “A fair compromise is reached with the inclusion of the opportunity to select between the new 12.5 per cent rate and the previous 20 per cent rate with inflation adjustment. It guarantees that taxpayers can choose the strategy that will reduce their tax liability while providing flexibility.”

However, please note that for property purchases after the cut-off date (i.e July 23, 2024), only the new regime with LTCG tax at the rate of 12.5 per cent without indexation will be applicable.

What was announced in the Union Budget 2024?

Finance Minister Nirmala Sitharaman announced the elimination of indexation benefits from real estate in the Budget 2024 which was presented on July 23rd. Sitharaman also lowered the LTCG tax from 20 per cent to 12.5 per cent, which the government said has been designed for the benefit of taxpayers.

However, this move was heavily criticised by industry experts who explained that this change could negatively affect a large number of property owners, particularly those owning residential property. The experts pointed out that property owners could see a significant increase in their tax burden after the implementation of the new regime.

Revenue Secretary Sanjay Malhotra in a press interaction supported the government’s proposal to remove indexation benefits from LTCG on real estate at the time and said that other asset classes, including incomes from shares, interest, and fixed deposits do not enjoy the same benefit.

Malhotra stated that this move should be seen as a ‘simplification measure’.

Grandfathering the Properties Bought Before July 23, 2024

As per the new amendments, all properties purchased before the Budget presentation date (July 23) have now been ‘grandfathered’.

What is Grandfathering? It is a concept that allows an old rule/law to apply to some or all situations up to a certain (or specified) date. The new rule or law in this case applies to all situations after that date.

The initial Budget 2024 announcements gave no provisions of grandfathering for properties bought after April 1, 2001. For properties purchased before that date, the fair market value as of April 1, 2001, was to be taken as the cost of acquisition.

Snapshot of New Amendments vis-a-vis property sale:

1. Individuals or HuF who bought houses before July 23, 2024, will be able to compute their taxes under the new scheme: 12.5 per cent without indexation.

2. Individuals or HuF who bought houses before July 23, 2024, will be able to compute their taxes under the old scheme: 20 per cent with indexation.

Please note: Home buyers who purchased properties before July 23, 2024, now have a choice between the two tax computation methods mentioned above. However, if you have bought the property after the cut-off date of July 23, 2024, you will only have the option of new regime with LTCG tax at the rate of 12.5 per cent without indexation.

What is the catch?

If you are confused about what suits best to your needs, please know that the choice between the two regimes depends on several factors, such as:

- The property's acquisition cost

- Holding period

- Inflation rate

Typically, properties held for a long time benefit more from the indexation method, as it adjusts the cost base for inflation thereby reducing taxable gains. According to Anuj Puri, Chairman, ANAROCK Group the government’s latest amendments would have the following impact on both homeowners and aspiring homebuyers:

For Homeowners, this change brings flexibility in 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 per cent 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 per cent rate sans indexation could be more beneficial and result in a lower tax burden.

For Homebuyers, Puri opines that the anticipation of these changes can potentially cause (some of) them to sell properties sooner to benefit from the new tax regime. This will raise the overall supply of housing units available on the market, helping to keep prices in check.

Moreover, these amendments will improve homebuyers' sentiment 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.

Sharing this view, Raj of Jenika Ventures states that this shift in policy is probably going to increase the amount of activity in the real estate market, which will encourage both purchasing and selling. Investors are more willing to buy real estate when their tax obligations are lower, which boosts market liquidity.

However, Shishir Baijal, Chairman and Managing Director, Knight Frank India notes that while the 12.5 per cent rate may seem immediately attractive, the decision to opt for it or the 20 per cent 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 per cent rate might be more beneficial. However, indexation could be advantageous in cases where property appreciation is closer to the inflation rate,” Baijal suggests.

Homeowners should note that this flexibility offers an opportunity to optimize tax payments based on their specific property investment scenarios.