Indexation On Immovable Property For Computation of Capital Gains

The Hon'ble FM sought to simplify the capital gains taxation regime and hence introduced a uniform lower rate of 12.5% to tax long-term capital gains ("new proposed provisions"). However, simultaneously indexation benefit was removed while computing long-term capital gains on the sale of property.

Indexation-protected costs increase due to inflationary trends from taxation. Post the announcement, there was a lot of buzz about the negative impact of the proposal especially since the value of properties had not substantially increased across cities and the new tax proposals would lead to increased tax burdens in most cases. Also, the government faced criticism for taxing the time value of money.

In line with the feedback received, now an amendment ('Amendment') has been proposed in the Finance bill introduced in the Lok Sabha. The Indexation benefit has been restored albeit for specific properties and subject to fulfillment of prescribed conditions.

It has now been proposed in the Amendment that for land or building or both purchased prior to 23 July 2024, the capital gain tax will be restricted to the tax payable as per the old provisions of law prior to the above amendment ("old provisions"). In other words, the individual will be required to compute the tax as per the old provisions (tax @ 20% with Indexation benefit) as well as per the new proposed provisions (tax @ 12.5% without indexation). If the tax payable as per the new proposed provisions exceeds the tax as per the old provisions, the excess shall be ignored. This helps in grandfathering investments in properties prior to 23 July 2024 transferred anytime after the date. The government has fairly sought a midway approach while simplifying the capital tax regime and managing the market sentiments.

It is important to note here that the above benefit of indexation has been provided only to Resident Individuals and HUFs and for properties acquired prior to 23 July 2024.
Accordingly, for non-residents and for any other assessee viz company, LLP etc., the new capital tax rates viz 12.5% without indexation benefit continues to apply. Further, properties purchased post 23 July 2024 will not enjoy the above relaxation.

Another significant observation of the Amendment is that since the tax liability shall be restricted to the tax computed as per the old provisions (i.e computation of capital gains with indexation), in case such computation results in a loss, such loss will be ignored and there will be no tax payable. In other words, the loss shall not be available for set-off or for carry forward and shall lapse.

Lastly, the Amendment is in respect of land or building or both only. Other assets are outside the proposed amendment and will continue to be taxed as per the new provisions.
Regrettably, indexation is not available for new properties acquired post 23 July 2024, so the relaxation is only partial and not a complete withdrawal/ reversal of the proposals in the budget.

With the Amendment, the Government has sought a midway. They have continued with the agenda of a simplified tax regime, kept away from retrospective amendments and also soothed market sentiments significantly. By providing indexation to investments in immovable properties acquired prior to 23 July, they have tried to grandfather the existing provisions similar to the grandfathering provided when tax on transfer of long-term listed securities was introduced. However, the loss if any under the old provisions shall lapse and will continue to hurt.