On Tuesday, the government moved to address a major worry raised by the 2024-25 Budget announcement by increasing flexibility in the computation of long-term capital gains (LTCG) tax on unlisted assets, including properties. For any assets sold before July 23, such as land or buildings, taxpayers can select between the new and old regimes, with the goal of lowering their tax liability.
The new LTCG regime sets the tax rate at 12.5%, without the benefit of indexation. In contrast, the previous regime imposed a 20% tax but provided indexation advantages. This flexibility basically acts as a grandfather clause for all property purchases conducted prior to the Budget's presentation in Parliament on July 23.
This change is one of the primary adjustments proposed in the Finance Bill 2024 for the taxation of immovable properties. The Bill includes around 25 further modifications. Nineteen of them are for direct taxes, while the others are for indirect tax legislation, such as customs. Finance Minister Nirmala Sitharaman is likely to bring this amendment, along with others, to the Lok Sabha on Wednesday, following her response to the Finance Bill 2024 discussion.
Sudhir Kapadia, a Senior Advisor at EY, commented on the modification, saying: "With this proposed revision to the original Finance Bill, the government has obviously heeded the reasonable concerns of many taxpayers. Without indexation, the tax bill could have been higher for individuals selling older homes." He went on to say that the current proposal provides "the best of both worlds". The 2024-25 Budget proposes a major change of the capital gains tax system, including decreasing the LTCG rate from 20% to 12.5% and abolishing indexation advantages for residences purchased on or after April 1, 2001.
This proposal has raised worries about real estate transactions, as indexation has previously enabled homeowners to account for inflation in tax calculations. Under the initial proposed rule, homeowners would not have been able to account for inflation, potentially resulting in significant taxes, particularly on older properties with lower selling prices.
Indexation is a way of adjusting the purchase price of an asset, such as property, for inflation over time, hence minimizing taxable capital gains upon sale. By eliminating indexation, the government hopes to streamline the tax calculating process. However, this move has resulted in greater tax responsibilities for property owners because capital gains are now calculated using the original purchase price without accounting for inflation.
