Temporary Reprieve for Homeowners as LTCG Indexation Changes May Be Deferred to FY26
Homeowners may receive temporary relief as the Finance Ministry considers amending LTCG tax provisions. India ranks among top 5 in cross-border real estate investments in APAC.
LtcgIndexationTax ReliefProperty OwnersReal EstateReal Estate NewsAug 05, 2024
In a significant move sparking both debate and interest, Finance Minister Nirmala Sitharaman’s latest budget has revised the taxation on long-term capital gains (LTCG) from real estate transactions.
Prior to the change, property sellers in India could reduce their tax liability using “indexation benefits,” which involved adjusting the profit from property sales based on the inflation rate during the ownership period.
According to a Business Standard report, one proposed change is to extend the effective date of the new regime to the next financial year, instead of July 23, the day the Budget was presented in Parliament.
The report also mentioned that discussions are ongoing about grandfathering the purchase of all asset classes, including property, so that the indexation provision could apply.
The new capital gains tax rules, which took effect on July 23, 2024, introduced significant changes to the calculation of capital gains. These changes eliminated the ability to adjust the acquisition cost for inflation, known as indexation.
“Some modalities are being worked out in some form in the proposed regime with the intent to provide relief to homeowners,” an official privy to the discussions told BS.
Alternative Proposal
According to a report by Business Today TV, an alternative proposal under review is to offer property sellers a choice between a 20% tax rate with indexation benefits or a 12.5% rate without indexation, as specified in section 112 of the Income Tax Act.
However, some officials have expressed concerns that this could complicate the tax process.
While there are no plans to reverse the decision entirely, adjustments may be considered to mitigate the impact based on feedback from industry stakeholders.
Discussions on the matter began after the real estate sector presented data points, arguing that the new tax structure could be detrimental to homeowners and the industry as a whole.
“The new changes in the works will be accommodated in the Finance Bill,” the official added.
Industry experts warn that many real estate owners, particularly those with residential properties, could face a significant increase in their tax burden without the indexation benefits.
Indexation adjusts the purchase price of assets for inflation, thereby reducing the taxable capital gains. This adjustment is based on the Cost Inflation Index, which is notified by the government.
Frequently Asked Questions
What are the changes to the LTCG tax provisions?
The Finance Ministry is planning to amend the LTCG tax provisions to provide relief to homeowners.
What is indexation and how does it affect tax liability?
Indexation adjusts the purchase price of assets for inflation, thereby reducing the taxable capital gains.
What are the proposed changes to the new regime?
One proposed change is to extend the effective date of the new regime to the next financial year, and another is to offer property sellers a choice between a 20% tax rate with indexation benefits or a 12.5% rate without indexation.
How will the changes affect real estate owners?
Industry experts warn that many real estate owners, particularly those with residential properties, could face a significant increase in their tax burden without the indexation benefits.
When will the new changes be implemented?
The new changes in the works will be accommodated in the Finance Bill, which is expected to be implemented in FY26.
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