New Tax Regime for Property Sales: No Indexation Benefit, 12.5% LTCG Rate
Union Finance Minister Nirmala Sitharaman has proposed to remove indexation benefit for property sales, and rationalize capital gains tax at 12.5%.
Property SalesLtcg TaxIndexation BenefitReal EstateCapital Gains TaxNirmala SitharamanReal EstateJul 23, 2024
The removal of indexation benefit is expected to ease the computation of capital gains for taxpayers and tax administrations. However, old real estate investments will continue to get indexation benefits up to the year 2000. This means that if a residential property was purchased in 1975 and is sold now, the seller can avail indexation benefit up to 2000, but not for the remaining 24 years.
Despite the changes, sellers of residential properties can still claim exemption under Section 54 of the Income Tax Act. This section provides for an exemption on LTCG tax from sale of residential property if the proceeds from the sale are used to purchase or construct another residential property.
The new tax rate of 12.5% without indexation benefit may be beneficial for sellers in certain scenarios. For instance, if a property's price triples in 10 years, the new system would be beneficial. However, if the property price increase is slower, the old system with indexation benefit may be more beneficial.
The real estate industry and investment advisory space are divided on the impact of this move. Some believe that with real estate taxation coming at par with LTCG tax on equity investments, investors may switch to equity investments, which are relatively more liquid and have ease of transaction. However, others argue that those dealing in cash and investing large sums in real estate will continue to invest in the same.
The government's move is expected to have significant implications for the real estate sector and individual investors. While the removal of indexation benefit may lead to an increase in tax liability for some, the rationalization of the capital gains tax rate may benefit others.
Frequently Asked Questions
What is the new capital gains tax rate on property sales?
The new capital gains tax rate on property sales is 12.5%.
Will old real estate investments still get indexation benefits?
Yes, old real estate investments will continue to get indexation benefits up to the year 2000.
Can sellers of residential properties still claim exemption under Section 54 of the Income Tax Act?
Yes, sellers of residential properties can still claim exemption under Section 54 of the Income Tax Act.
How will the removal of indexation benefit affect real estate investors?
The removal of indexation benefit may lead to an increase in tax liability for some real estate investors, while others may benefit from the rationalization of the capital gains tax rate.
Will this move lead to an increase in black money transactions?
Some experts believe that this move may lead to an increase in black money transactions, as investors may seek to avoid paying taxes.
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