Government to Restore Indexation Benefit for Property, Bringing Relief to Homeowners
The government is set to introduce flexibility in computing capital gains tax on immovable property, offering relief to taxpayers and the real estate industry.
Property TaxCapital Gains TaxIndexation BenefitReal Estate IndustryTax ReliefReal EstateAug 06, 2024
Finance Minister Nirmala Sitharaman is expected to propose amendments to the provisions of the Bill on Wednesday in Parliament. The amendment will allow taxpayers to choose the lower tax burden between the new and old schemes.
By enabling taxpayers to choose the lower tax burden between the new and old schemes, the amendment is poised to drive investment and enhance sales across housing segments. The plan is to allow those selling assets bought before 23 July 2024 to compute their capital gains tax obligation in either the earlier or the new tax schemes, whichever suits them. This restores the indexation benefit available on sale of property.
In the case of transfer of a long-term capital asset such as land or building acquired prior to 23 July, 2024, the taxpayer can compute his tax either at 12.5% without indexation—the new scheme—or at 20% with indexation, the old scheme, and pay such tax that is lower of the two.
This is a roll back of the withdrawal of the indexation benefit, explained Amit Singhania, managing partner at Areete Law Offices. If the tax payable under the new regime (without indexation benefit) at the rate of 12.5% exceeds the tax payable under the old regime (with indexation benefit) at the rate of 20% then, such excess shall be ignored.
Indexation benefit refers to adjusting the purchase price of an asset for inflation while computing the capital gains tax. This helps reduce the tax burden on the seller. The indexed purchase price is calculated using a cost inflation index (CII).
Niranjan Hiranandani, chairman of Hiranandani Group and NAREDCO, applauded the move, calling it a significant step forward. By enabling taxpayers to choose the lower tax burden between the new and old schemes, the amendment is poised to drive investment and enhance sales across housing segments.
The government had proposed to amend the capital gains tax structure in the budget presented in Parliament on 23 July. However, the removal of the indexation benefit led to calls from investors for its restoration, saying the lower tax rate proposed in the bill without indexation may not benefit the sellers in all circumstances.
The finance bill had initially proposed to allow neutralisation of the foreign exchange fluctuations for foreign investors while computing their capital gains. However, the amendments to the finance bill propose to take away this benefit along with the increase in tax rate from 10% to 12.5%.
The Centre is proposing as many as 45 amendments to the finance bill. The changes come after it held extensive consultations with the industry after the budget announcements.
Simplifying and rationalising the tax regime is a priority for the government. The finance minister had in her budget speech announced a comprehensive review of the Income Tax Act, which is expected to be completed in six months.
Frequently Asked Questions
What is indexation benefit?
Indexation benefit refers to adjusting the purchase price of an asset for inflation while computing the capital gains tax.
What is the impact of the amendment on taxpayers?
The amendment will allow taxpayers to choose the lower tax burden between the new and old schemes, which is expected to drive investment and enhance sales across housing segments.
What is the new tax scheme proposed by the government?
The new tax scheme proposed by the government is a tax rate of 12.5% without indexation, which is lower than the old scheme of 20% with indexation.
Why did the government roll back the withdrawal of indexation benefit?
The government rolled back the withdrawal of indexation benefit after investors called for its restoration, saying the lower tax rate proposed in the bill without indexation may not benefit the sellers in all circumstances.
What is the expected completion date of the comprehensive review of the Income Tax Act?
The comprehensive review of the Income Tax Act is expected to be completed in six months.
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