The long-term capital gains tax regime which was modified in the recent budget’s announcement provoked criticism from the opposition parties. Particularly from NDA coalition members, the government has backed down and agreed to provide some relief for real estate transactions.
An announcement was made by Finance Minister Nirmala Sitharaman on long-term capital gains which was reduced from 20% with indexation benefits to 12% without indexation benefits. Taxpayers can choose either of the Two Tax Rates
Facing the backlash, a small amendment is being made in The Finance Bill, 2024. As per the details given to the members of the Lok Sabha, the taxpayer will have an option to choose of these two tax rates which are lower for him in a case where there have been transactions of immovable properties such as land and building, acquired before July 23 in this calendar year.
This marks a significant reversal from the government’s firm stance on the issue after the changes in the Budget had evoked sharp critiques about the deleterious impact of the loss of indexation benefits on middle-class homeowners, and the real estate sector at a broader level. Officials had argued that the new tax rate structure, with a lower tax rate minus the indexation benefits, would benefit people in almost all cases.
Retrospective tax change effects:
Industry associations had requested a reconsideration of the plan after pointing out that eliminating indexation advantages amounted to a retroactive tax adjustment for people who had already purchased real estate.
They had made it clear that people who had invested in assets that had experienced less value growth over time would be particularly badly hit by this.
Additionally, several MPs have urged the government to reevaluate the idea. TDP MP Lavu Sri Krishna Devarayalu expressed the opinion of other MPs during the Lok Sabha’s Tuesday debate on the Finance Bill by stating that there was a lot of discussion on this topic outside of the House.
Mr. Devarayalu said that the middle class was impacted by this, which involved taxpayers’ hard-earned money. Therefore, I believe that this indexation needs to be reviewed since middle-class individuals believe that real estate is one investment they can make with confidence. It ought to be safeguarded, in our opinion. He remarked, “I am, hoping the Finance Minister would take heed of this”.
Decoding The Capital Gains Tax Rates to Choose:
The long-term capital gains tax rate was lowered from 20% to 12.5% by the Union Budget 2024 earlier this year, but the indexation benefit—which factored in inflation when determining a property’s purchase price—was eliminated. Many property owners were predicted to have a higher tax burden as a result of this shift.
People who own real estate were greatly influenced by this development. The new idea decreased taxes, which benefited those who had achieved large gains in a short period. Yet, long-term real estate owners might be subject to a larger tax burden.
This penalized those who had purchased the real estate for their personal use and primarily benefited real estate investors. The government has since changed the plan to permit the indexation of real estate purchased before July 23, 2024.
The government has allowed to choose between two options:
Option 1 will be, to pay a 20% tax on capital gains after adjusting the purchase price for inflation(Indexation)
Option 2 is to pay a 12.5% tax without indexation adjustment.
Taxpayers have the choice to choose the alternative that minimizes their tax obligation. Nevertheless, this relief is limited to properties purchased before July 23, 2024.
The deadline is July 23, 2024, and properties (mostly immovable assets, such as land and buildings) acquired before then will, in a sense, qualify for grandfathering benefits.
If you purchased your property before this date, you are qualified to benefit from the old and new tax regimes and select either 12.5% without indexation or 20% with indexation, depending on which is better for the assessee.
Thus, if your tax liability under the new rate without indexation is higher, this provides a shield that limits your capital gains tax liability arising under your old one with indexation.
Property owners now have options and are protected from negative consequences if the indexation advantage is eliminated thanks to this modification.
Capital gains modification with example of cases:
If you have bought a property of Rs. 1 crore and sold it for Rs. 5 crores in 2024, you have two options to choose on the tax rates:
Option A: A 20% tax payment on the adjusted earnings after inflation is considered
Option B: taxing the full Rs 4 crore profit at a rate of 12.5%.
Case 1: an asset was bought on January 1, 2002, for Rs 1,00,00,000, and sold on August 1, 2024, for Rs 5,00,00,000. There would be a tax of Rs 50,00,000 at a rate of 12.5% on the gains of Rs 4,00,00,000 that are not indexable.
The benefits after indexation amount to Rs 1,37,00,000 when the indexed cost of Rs 3,63,00,000 is taken into account. These indexed gains are subject to a 20% tax rate, totaling Rs 27,40,000. Since the smaller of the two computed tax amounts, Rs 27,40,000 is the amount of tax that must be paid.
Case 2, On January 1, 2015, an asset was bought for Rs 1,80,00,000, and on August 1, 2024, it was sold for Rs 5,00,00,000. There would be a tax of Rs 40,00,000 at a rate of 12.5% on the gains of Rs 3,20,00,000 that are not indexable.
The benefits after indexation are Rs 2,27,75,000 when the indexed cost of Rs 2,72,25,000 is taken into account. These indexed gains are subject to a 20% tax rate, totaling Rs 45,55,000. Since the smaller of the two computed tax amounts, Rs 40,00,000 is the amount of tax payable.
It is important to remember that the respite from additional taxes that taxpayers may experience as a result of the proposed regime is the sole thing this revised proposal offers. It does not give the taxpayer the choice of calculating their capital gains tax liability under the previous or current regime.
As such, if computing capital gains under the previous regime produces a loss, the taxpayer would not be permitted to recognize that loss in their returns.
Important things to keep in mind:
- Only capital gains from the sale of real estate are affected by this change.
- There is no choice between the old and new regimes for taxpayers. The relevant tax will be decided by the government using the computations.
- The taxpayer is not eligible to claim any losses incurred under the previous regime under the current one.
- In general, the government’s action is to strike a compromise between the requirement for tax revenue and taxpayers’ worries about the effects of the withdrawal of the indexation benefit.
To Conclude:
With long-term real estate transactions (acquired before July 23, 2024), the government’s decision to give taxpayers a choice between a 12.5% tax rate without indexation and a 20% rate with indexation gives sellers flexibility.
They can now select the option that best fits their financial situation and the amount of appreciation on their property.
Even though the 12.5% rate could sound appealing at first, you should carefully analyze your unique situation before deciding whether to use the 20% rate with indexation or the 12.5% rate. Ideally, the 12.5% rate may be more advantageous if the value of the property has greatly exceeded inflation.
However, when property appreciation is more in line with the rate of inflation, indexation may be beneficial.