The Indian government has introduced a pivotal amendment to the long-term capital gains (LTCG) tax system for real estate transactions, offering property owners a new choice in how their taxes are calculated. As of the recent update, homeowners can now select between two tax rates: a 12.5% rate without the benefit of indexation or a 20% rate that includes indexation.
This policy change follows an announcement by Finance Minister Nirmala Sitharaman on July 23, 2024, where she proposed lowering the LTCG tax rate to 12.5% while simultaneously removing the indexation benefit—a mechanism that previously allowed homeowners to adjust the purchase price of their property for inflation. The removal of this benefit was initially expected to increase the tax burden for many.
The adjustment was made in response to concerns from the real estate sector, where stakeholders feared that eliminating indexation would lead to increased taxes. As a result, the government has introduced an option that allows taxpayers to choose the most beneficial tax regime for their situation.
Key Considerations for Homeowners:
- 12.5% LTCG Rate Without Indexation: This option presents a lower tax rate of 12.5% on the capital gains from property sales, without accounting for inflation. It may be advantageous in scenarios where the property’s value has increased significantly beyond the inflation rate.
- 20% LTCG Rate With Indexation: The traditional option allows taxpayers to adjust the property’s purchase price based on the Cost Inflation Index (CII), potentially reducing the taxable gains and overall tax liability. This is beneficial when the appreciation in property value is closer to the inflation rate.
It is important to note that taxpayers are not given the freedom to switch between these tax regimes arbitrarily. The tax liability will be calculated by the government, which will decide the applicable tax rate. If the old tax regime results in a negative outcome, the loss cannot be offset against gains under the new regime.
Quickly estimate your tax liability on property sales with our easy-to-use Capital Gains Calculator. Access it here.
Expert Opinions:
Shishir Baijal, Chairman and Managing Director at Knight Frank India, emphasized that the new flexibility allows sellers to choose the best option based on their financial circumstances. Rishi Anand, MD & CEO at Aadhar Housing Finance Limited, highlighted that properties acquired before July 23, 2024, will benefit from a grandfathering provision, allowing homeowners to select the most favorable tax regime.
Meanwhile, Vivek Rathi, National Director-Research at Knight Frank India, noted that if a property’s value has outpaced inflation, the new 12.5% tax rate could be more beneficial than the previous 20% rate with indexation. This view is echoed by Nitin Bavisi, CFO at Ajmera Realty & Infra India Ltd., who sees the new regime as a potential boost for real estate investments across various housing segments.
Anuj Puri, Chairman of ANAROCK Group, discussed the implications for both homeowners and prospective buyers. He suggests that the new rules could stimulate the housing market by providing clarity and potentially reducing the tax burden on sellers. Puri also pointed out that the residential property market is likely to benefit from increased demand as a result of this change.
However, it is important to remember, as Kunal Savani, Partner at Cyril Amarchand Mangaldas, noted, that this adjustment does not provide an option for taxpayers to choose between the old and new regimes at will. Any loss incurred under the old regime cannot be carried forward to offset gains under the new regime.