Lok Sabha gives nod to govt amendment to restore indexation for properties bought before 23 July

The Union Budget had proposed removing indexation benefit on long-term capital gains on real estate sales, but tax was reduced to 12.5% from 20%.

Representational image | PTI

New Delhi: The government Wednesday received the Lok Sabha’s nod to roll back its budget proposal to remove the indexation benefit on long-term capital gains (LTCG) on real estate, through amendments to the Finance Bill 2024 passed in the lower house. As per the amendments, the indexation benefit will now be applicable to all properties bought before 23 July, 2024.

In the budget, Finance Minister Nirmala Sitharaman had announced that LTCG on real estate would be calculated at 12.5 percent instead of the earlier 20 percent. Along with this, she announced that the indexation benefit would be removed. Later, she clarified that properties bought before 2001 would still get the indexation benefit, but those bought after would not.

This received very strong backlash from the government’s supporters and critics alike. Many analysts pointed out that removing the indexation benefit for properties bought a long time ago would mean that selling them would entail a higher tax outgo on account of just inflation.

Following this feedback, through an amendment to the Finance Act, the government sought and received parliamentary approval to give homeowners a choice: they can compute their taxes under the new scheme — which is at the rate of 12.5 percent without indexation — or the old scheme, which is a tax rate of 20 percent with indexation, and pay tax using whichever method comes out to be lower.

According to the amendment, this rollback would apply only to land and buildings, and not to other assets on which LTCG is also applicable.

Harsh Bhuta, Partner at Bhuta Shah & Co LLP, a chartered accountancy firm said, “This is a huge relief to the middle class owning real estate… It is rare to see a tax provision where the government seeks to tax the lower of the two options.”

“Giving this relief to the taxpayer underscores that the Government has heard the plea and taken a very pragmatic view of the matter,” Sameer Gupta, national tax leader at EY India said.

How does indexation work?

The indexation provision was seen as a way asset owners could hedge against inflation. Let us take the example of someone who bought a property 25 years ago and wants to sell it now. Its price would have likely increased substantially. That is, the difference between the purchase price and the selling price would be quite large. LTCG is calculated on this difference. The larger the difference, the higher the tax that needs to be paid.

While a part of the increase in price could be due to the increase in the value of the property itself, another part is because of inflation — or the overall rise in prices — over the 25-year period. The indexation tool allows the taxpayer to factor in this inflation effect and adjust their purchase price for the purpose of tax calculation.

This was the benefit that the budget sought to remove, albeit by also fixing the LTCG rate lower than earlier.

This is an updated version of the report

(Edited by Tikli Basu)