The administration suggested lowering the long-term capital gains tax on immovable assets from 20% to 12.5%, while eliminating indexation incentives.
New Delhi , 24 july 2024
Union Finance Minister Nirmala Sitharaman announced many reforms to the direct and indirect tax regimes during her budget speech. Key highlights included changes to the long-term capital gains (LTCG) tax for listed assets, the elimination of indexation benefits, and the elimination of the angel tax for investors.
Union Finance Minister Nirmala Sitharaman announced many reforms to the direct and indirect tax regimes during her budget speech. Key highlights included changes to the long-term capital gains (LTCG) tax for listed assets, the elimination of indexation benefits, and the elimination of the angel tax for investors.
One of the most noticeable changes is the LTCG tax and the absence of indexation benefits, which have resulted in a large gap among property sellers based on whether they purchased or inherited their homes before or after 2001, making 2001 a critical threshold.
Also Read: Yadav’s ‘Monsoon Offer’ Jibe Escalates BJP’s Intraparty Conflict
In response to media enquiries concerning the Budget proposal, Finance Secretary T.V. Somanathan clarified that the indexation benefit will be applicable to houses purchased before 2001.
The Union Budget 2024-25 effectively splits property sellers into two categories: those who purchased or inherited properties before 2001 and those who bought or inherited properties after 2001.
Sellers in the first category will continue to benefit from indexation, which adjusts the property’s purchase price for inflation, lowering taxable gains. They will also benefit from a decreased LTCG tax rate of 12.5%, down from the previous 20%.
Sellers in the second category will not profit from indexation. This means that their capital gains will be calculated using only the actual purchase and selling prices, with no inflation adjustment. Although they will gain from the 12.5% LTCG tax rate, they will miss out on the inflation-adjustment benefit of indexation.
Indexation is a strategy that allows investors to adjust the purchase price of their assets for inflation, lowering the taxable profit at sale. For example, if a flat was purchased before 2001, its value can be modified to reflect April 2001 prices using indexation. Any gains derived from the modified valuation will be taxed at the new, lower rate of 12.5%.
However, for a flat purchased in 2003, capital gains will be calculated only on the difference between the buy and selling prices, with no inflation adjustment, but will be taxed at the new 12.5% LTCG rate.
According to Somanathan, these adjustments would have no detrimental impact on the majority of property sellers. “In 95% of circumstances, the 12.5% rate will be advantageous.
On the other side, Deloitte India Partner Aarti Raote stated that taxing LTCG without indexation will have a substantial impact on taxpayers.
“The indexation benefit was designed to modify the asset’s cost to reflect its current value, allowing gains to be recorded against the sale price. Now, however, taxpayers will be taxed on the difference between the actual purchase price and the sale price, resulting in a significant increase in their tax burden,” she stated.
Anupama Reddy, Vice President and Co-Group Head (Corporate Ratings) at ICRA, also stated that, despite the lower LTCG tax rate, the elimination of the indexation benefit at the time of property sale is likely to result in a higher tax liability for investors, given the long-term returns in the residential real estate sector.
“As a result, this change is negative for the sector,” he said.
Also Read: Examining the Educational Journeys of Jeet and Karan, the Heirs to Gautam Adani’s Empire
