The government has introduced a relief measure for taxpayers affected by the recent changes in long-term capital gains tax on property.
The Union Budget 2024 earlier this year had reduced the tax rate on long-term capital gains from 20% to 12.5% but removed the indexation benefit, which adjusted the purchase price of a property for inflation. This change was expected to increase the tax burden for many property owners.
“This change significantly impacted people owning real estate. The people who had made significant gains in a short term benefitted as their tax was reduced in the new proposal. But those people who had owned real estate for a long period of time would possibly become liable to a higher amount of tax.
This largely benefitted investors in real estate and penalised those who had bought the real estate for their own use. The Govt has now revised the proposal to allow for indexation of immovable properties which have been acquired before 23rd July, 2024,” said Ankit Jain, Partner, Ved Jain & Associates.
In response to public outcry, the government has now allowed taxpayers to choose between two options:
Option 1: Pay a 20% tax on capital gains after adjusting the purchase price for inflation (indexation).
Option 2: Pay a 12.5% tax on capital gains without indexation adjustment.
Taxpayers can select the option that results in a lower tax liability. This relief, however, is only applicable to properties acquired before July 23, 2024.
” 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.
This change provides flexibility to property owners and ensures they are not adversely affected by the removal of the indexation benefit.
Jain explains with the following examples:
If you bought a property for Rs 1 crore in 2002 and sold it for Rs 5 crore in 2024, you can choose between:
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Paying a 20% tax on the adjusted profit after considering inflation. -
Paying a 12.5% tax on the entire profit of Rs 4 crore.
Case 1: In Case 1, an asset was purchased for 1,00,00,000 on January 1, 2002, and sold for Rs 5,00,00,000 on August 1, 2024. The gains without indexation amount to Rs 4,00,00,000, resulting in a tax of Rs 50,00,000 at a rate of 12.5%. When considering the indexed cost, which is Rs 3,63,00,000, the gains after indexation are Rs 1,37,00,000. The tax on these indexed gains is Rs 27,40,000 at a rate of 20%. Therefore, the tax payable is Rs 27,40,000, as it is the lower of the two calculated tax amounts.
“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
Important points to remember:
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This change only applies to capital gains from property sales. -
Taxpayers cannot choose between the old and new regimes. The government will determine the applicable tax based on the calculations. -
If the old regime results in a loss, the taxpayer cannot claim this loss under the new regime. -
Overall, the government’s move aims to balance the need for tax revenue with the concerns of taxpayers regarding the impact of the indexation benefit removal.
“The 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) 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,” said Shishir Baijal, Chairman and Managing Director, Knight Frank India.
First Published: Aug 07 2024 | 2:22 PM IST
