Government Poised to Adjust Long-Term Capital Gains Tax on Real Estate
News Mania Desk/Agnibeena Ghosh/5th August 2024
The Indian government is considering modifications to its recent Budget proposal concerning the taxation of long-term capital gains (LTCG) from real estate transactions, potentially offering relief to property investors. The initial proposal, set to take effect from July 23, 2024, could be postponed to April 1, 2025, according to sources familiar with the discussions. Additionally, the government might retain the indexation benefit for some transactions or adjust the cut-off date for its removal from April 1, 2001, to a later date.
These adjustments are expected to be addressed through an amendment to the Finance Bill 2024, which will be reviewed by the Lok Sabha this week. Despite these potential changes, the government is likely to maintain the new LTCG tax rate at 12.5%, a reduction from the current rate of 20%.
Indexation is a mechanism that adjusts the capital gains from property sales by accounting for inflation during the ownership period. This is computed using the cost price index. The Budget 2024-25 proposed lowering the LTCG tax rate to 12.5% for properties and other unlisted assets but suggested eliminating the indexation benefit for properties purchased on or after April 1, 2001. This proposal has generated concerns that it could lead to decreased post-tax gains from property sales, potentially resulting in reduced real estate demand and fewer transactions.
Government officials and experts argue that the new regime might not always result in higher tax burdens for property sellers. In cases where property values appreciate significantly, particularly in major metropolitan areas, the new tax structure could be advantageous for taxpayers. The Income Tax department highlighted that typical real estate returns range from 12% to 16% annually, which is substantially higher than inflation rates, generally between 4% and 5%. This suggests that removing indexation might still result in substantial tax savings for most taxpayers.
Officials acknowledge that there needs to be a balanced approach to ensure that the government does not forgo significant revenue while still providing relief to taxpayers. The potential for some form of indexation benefit to be retained or offered as an option is being explored.
Analysts have proposed several ways to refine the new regime. For instance, Shalini Mathur, Director at EY India, suggested that taxpayers might be allowed to choose between the old regime with a 20% LTCG tax rate and indexation benefits or the new 12.5% rate without indexation, depending on which option is more beneficial. Yogesh Kale, Executive Director at Nangia Andersen LLP, echoed this sentiment, proposing that the government could offer taxpayers the flexibility to opt for either the old or new tax regime, based on individual circumstances and property acquisition dates.
As the government works through these potential adjustments, the real estate sector and investors will be keenly watching the developments to understand how the changes will impact their investments and the broader market dynamics.
