In response to widespread criticism, the government has rolled back its initial Budget proposal to remove indexation benefits on long-term capital gains (LTCG) from property sales. Taxpayers now have the option to pay 20% LTCG tax with indexation on properties acquired before July 23, 2024, while also retaining the new option of a 12.5% tax rate without indexation. This move aims to address the concerns of real estate investors and property owners who were alarmed by the potential financial impact of the initial proposal.
Indexation is a vital process that adjusts the original purchase price of an asset to account for inflation, providing a more accurate picture of real gains and reducing tax liability on capital gains. Without indexation, especially for long-held assets, the apparent gains can be misleadingly high, leading to an inflated tax burden. The government’s rollback ensures that properties bought before the specified date can benefit from this adjustment.
The amendments, presented in the Finance Bill, signify a major concession by the government following backlash from various sectors. While the initial proposal suggested that the removal of indexation was offset by a lower tax rate of 12.5%, it failed to appease many stakeholders who argued that indexation benefits were crucial for fair taxation, particularly in the real estate market where holding periods can be lengthy.
However, it’s important to note that for properties purchased after July 23, 2024, the 12.5% LTCG tax rate without indexation will be the only option. This distinction between pre- and post-Budget acquisitions aims to balance taxpayer relief with the government’s intent to streamline the tax regime.
The reinstatement of indexation benefits for pre-Budget property purchases also introduces the concept of “grandfathering,” allowing older rules to apply to certain situations up to a specific date. This provision ensures that taxpayers who made investment decisions based on the existing rules are not adversely affected by sudden policy changes. The initial Budget proposal had overlooked the need for grandfathering, causing significant concern among investors.
The Finance Ministry has clarified that the choice between the old and new LTCG tax regimes applies only to immovable properties acquired before the cutoff date. For unlisted securities and other assets like gold, different rules will apply, with capital gains from these assets being taxed at 10% for transfers before July 23 and 12.5% thereafter.
The government’s initial proposal sparked fears of a steep rise in LTCG tax liability for property sellers, leading to multiple clarifications from the Finance Ministry and Income Tax Department. The authorities argued that the new LTCG tax regime would be advantageous in most cases, as real estate returns typically exceed inflation rates. However, concerns remained, particularly for scenarios with lower returns where the previous tax rate with indexation would be more beneficial.
Critics also highlighted the lack of grandfathering for properties purchased over the past two decades, urging the government to provide relief for investments made under previous rules. The recent amendments address these concerns by offering a choice between the old and new tax regimes for properties bought before the Budget date.
Despite these amendments, some apprehensions persist. Industry observers and opposition lawmakers have raised concerns that the new regime might lead to increased secondary market sales and encourage cash transactions in real estate to reduce tax liabilities. These potential side effects underscore the complexity of tax policy changes and the need for careful consideration of their broader implications.
Among other notable amendments to the Finance Bill, the definition of undisclosed income for block assessments has been expanded. This now includes incorrect claims of exemption, reflecting the government’s ongoing efforts to tighten tax compliance and reduce tax evasion.
Overall, the government’s decision to restore indexation benefits for pre-Budget property sales demonstrates its responsiveness to public and industry feedback. This move seeks to balance the need for a simplified tax regime with the protection of taxpayers’ interests, ensuring a fairer taxation system for long-term investors.
