FM gives choice to property owners-20% LTCG with indexation or 12.5% without indexation

One of the most debated points of Budget 2024-25 was the proposal made by the finance minister Nirmala Sitharaman to change long -term capital gains (LTCG) tax rate to 12.5% for all financial and non-financial assests to bring in uniformity in capital gains tax regime. While the LTCG tax was 20% earlier for the real estate sector, with this proposal it was reduced to 12.5% but with the removal of indexation benefit. 

This was not well-accepted by the real estate segment. Following a strong backlash, the Union government took steps to provide significant relief to homebuyers by making changes to the Finance Bill 2024 presented by finance minister Nirmala Sitharaman in the Lok Sabha on August 6, 2024. Under this, all individuals who purchased houses before July 23, 2024 will have an option to choose between the two tax rates of LTCG- 20% with indexation or 12.5% without indexation. 

Naushad Panjwani, chairman, Mandarus Partners LLP and chairman of Finance, Corporate and Allied Laws Committee of Bombay Chartered Accountants’ Society, said, “While the intent of proposing the change was to simplify the LTCG tax, it could have been better thought and researched, especially on the negative implications. However, the government promptly amended the Finance Bill, 2024 by restoring indexation and giving the benefit to the people who purchased properties before July 23, 2024.” 

What is better for the homebuyer- LTCG with indexation or without indexation? 

This depends on case-to-case basis. 

Chintan Sheth, chairman and managing director, Sheth Realty, “The option to select indexation or opt for the old scheme offers a significant relief for long-term capital gains on immovable property. For instance, if someone has an ancestral property from the 1980s and plans to sell it in 2024, opting for the 20% long-term capital gains tax with indexation might be more beneficial. This flexibility allows investors and property owners to better manage their real estate investments and maximise their returns.”

“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. This amendment is expected to stimulate investment and sales in the housing market by potentially reducing the tax burden on sellers,” said, 

Shishir Baijal, chairman and managing director, Knight Frank India. 

How to evaluate which option is better? 

Example 1:  The home buyer buys a property in Mumbai in 2005 for Rs 20 lakh and sells in 2024 for Rs 1.5 crore.

In the above cited example, paying the long-term capital gains tax without indexation is beneficial for the homebuyer. 

Example 2:  The home buyer buys a property in Mumbai in 2005 for Rs 20 lakh and sells in 2024 for Rs 2.5 crore.

In the above cited example too, paying the long-term capital gains tax without indexation is beneficial for the homebuyer. 

Example 3: The home buyer buys a property in Mumbai in 2005 for Rs 20 lakh and sells in 2024 for Rs 1 crore.

In this case, the LTCG paid with indexation works in favour of the homebuyer. 

Example 4: The home buyer buys a property in Mumbai in 2014 for Rs 1 crore and sells in 2024 for Rs 1.2 crore.

In this example, because the tax with indexation is in negative, that means the home buyers hasn’t made any long terms capital gains and thus need not pay the LTCG. 

However, when you look at tax with indexation, although the homebuyer has not made any long terms capital gains, he has to pay a tax of Rs 2.5 lakh.  In this scenario, which the real estate segment has seen in the past when the property market was stagnant, a home buyer is best helped when he is allowed to pay LTCG tax with indexation.  

Who will benefit with this amendment?

All homebuyers who have bought properties before July 23, 2024 will benefit of this amendment. The grandfathering provision states that properties purchased before 2001 will be valued based on indexation as of January 2001. This benefit applies to properties held from 2001 to the July 23, 2024. 

After Budget 2024, the government clarified that the indexation withdrawal proposal was applicable on properties acquired after 2001, meaning the capital gains would be grandfathered until 2001. However, with the amendment made on August 6, 2024, this grandfathering period is now till July 23, 2024.

Anuj Goradia, director- Dosti Realty, said, “This flexibility allows sellers to choose the most advantageous option, minimising their tax liability. It applies to all Indian citizens and HUFs, but excludes NRIs, companies and LLPs. This will maintain market liquidity in the hands of individuals, encouraging them to sell older properties and invest in new ones, thereby revitalising the real estate market.”

Ritesh Mehta, senior director and head (North and West) – Residential Services and Developer Initiative, India, JLL, added, “This amendment will specially give relief to the middle-class who are quite sensitive about any tax policy changes and the changes in financial structure. By maintaining the cycle of selling and buying, this can foster increased liquidity and a greater sense of optimism within the real estate sector.”

Who will not benefit from this amendment?

The financial and non-financial assets will be classified as short-term and long-term under only two holding periods- 12 months and 24 months. Note that the 36-month holding period does not exist anymore. 

The amendment pertains to specified persons being resident individuals and HUFs who own immovable property purchased before July 23, 2024. “Developers who own immovable properties in companies and LLPs will not get any benefit of this amendment. Moreover, developers’ income is taxed as business income and not as capital gains. So, they are not directly affected by the amendment. Further, immovable property purchased after July 23, 2024 will continue to be taxed under the new law at 12.5% on LTCG without indexation benefits. I believe investors will continue to invest in immovable properties for long term wealth creation irrespective of tax amendments. However, there may be a slight change in price of properties to attract investors if the real estate market slows down due to tax implications,” said, Dhruv Chopra, managing partner, Dewan P. N. Chopra & Co.

Housing.com POV

While you may not see this as a rollback, homebuyers will not be affected by the retrospective taxation with this relief. The cut-off date for removing indexation benefit has been advanced till July 23, 2024 which is a positive for the real estate industry. As the new regime will be effective two years from now, people would be well-aware and do calculations to pay their LTCG tax accordingly.