In a major good news, the Indian government has tweaked its Budget proposal on capital gains arising from sale of property. This comes after a series of backlash and criticism over the central government's move to scrap indexation benefits in long-term capital gains (LTCG) which enabled property owners to hedge maximum gains against inflation.
New Relief In Property Tax!
Under the tweaked Finance Bill 2024, now, the government is offering the option to choose between the lower tax rate of 12.5% under the new tax regime or opt for the old tax regime where a 20% indexation rate is already provided.
This move is likely to boost the real estate sector as property owners will be able to choose a tax regime which is more beneficial for the sale of their properties.
As per reports, the Finance Ministry is scheduled to put the amendments of the Finance Bill 2024, on August 7th, before the parliament. However, GoodReturns could not confirm the same. And no official statement has been made on the development yet.
Budget Proposed Property Tax:
Finance Minister Nirmala Sitharaman on July 23 trimmed the long-term capital gains (LTCG) to 12.5% from the earlier rate of 20% and further eliminated the benefits of indexation which technically enables citizens to adjust prices for inflation.
In her Budget speech, Sitharaman last month said, "Long-term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent. For the benefit of the lower and middle-income classes, I propose to increase the limit of exemption of capital gains on certain financial assets to ₹ 1.25 lakh per year."
Hence, LTCG would have continued to be at 20% rate with indexation on properties sold till July 22, 2024. But after Budget Day (July 23, 2024), the sale will attract 12.5% tax rate without indexation.
She added that listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.
This Budget proposal received backlash from the opposition and many others.
Post the Budget announcement, Nanda Kishore, Managing Director, Ramky Estates & Farms Limited, said that the reduction of the Long-Term Capital Gains Tax (LTCG) on property sales from 20% to 12.5% is a welcome wave. However, the removal of the indexation benefit for properties bought after 2001 will certainly impact all if they are holding for more than 3 to 5 years.
As per Sandipan Roy, CIO, Motilal Oswal Private Wealth, Real Estate, Gold and Unlisted Equity had indexation benefits which now will not be there. Real Estate thus loses out the most.
What Is Indexation Benefit?
According to ClearTax, indexation plays an important role in calculating gain or loss on your investments. Indexation will reduce your overall tax liability by adjusting the purchase price of the underlying asset or investment. You will be able to realise higher gains as you can adjust them against the rate of inflation of the year of purchase and sale. Long-term capital gains are calculated in the same way as short-term capital gains, but the purchase cost and cost of improvement are replaced with the indexed cost of acquisition and indexed cost of the improvement
Further, it explained how the 20% indexation works out on property sales. Here's an example by ClearTax:
Long-term capital gains are taxed at the rate of 20.8% (rate including health and education cess @ 4%) with indexation. Indexation is a technique to adjust the cost of the asset according to the inflation index. It will increase your cost and reduce your gains and thereby, tax liability. So, under long-term capital asset, the benefit of indexation is available, plus the person who falls in the tax bracket of 30% also gets the advantage of paying the lower tax rate of 20%.
The calculation of Indexed cost can be done with the help of the following formula:
The formula for calculation of indexed cost is: Cost of acquisition X Cost Inflation Index (CII) of the year of sale / CII of the year in which the property was first held or FY 2001-2002, whichever is later. CII Index data for every year since FY 2001-02 till date is available.
Notably, if the property was acquired before 1 April 2001, the actual cost of the property or the FMV of the property as of 1 April 2001, as opted by the taxpayer, should be deemed to be the cost of acquisition.
Meanwhile, the formular for Indexed Cost of Improvement = Cost of improvement X CII of the year or sale / CII of the year in which improvement took place
Example: If Mr X bought a residential apartment on 1st Jan 2017 for Rs 20,00,000. He spent Rs 200,000 on interiors on 1st May 2020. Now, on 1st May 2024, he is planning to sell the property for Rs 60,00,000. Calculate the capital gain on the same.
(Image Source: ClearTax)
If in the above example property is sold in August, 2024:
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