In a notable shift in tax policy, the Indian government has proposed an amendment allowing property buyers to choose between two tax calculation methods for long-term capital gains (LTCG) under the Finance Bill, tabled in the Lok Sabha on August 6. This new provision will impact transactions involving property acquired before July 23, 2024.
As per the amendment, taxpayers can opt to calculate their LTCG taxes using either the new scheme—at a reduced rate of 12.5% without indexation—or the old scheme, which maintains a 20% rate with indexation benefits. Indexation adjusts the purchase price of an asset for inflation, effectively reducing the taxable gains and, consequently, the tax liability.
A person familiar with the matter explained, “In the case of transfer of a long-term capital asset, being land or building or both, by an individual or Hindu Undivided Family (HuF), which is acquired before the 23rd day of July 2024, the taxpayer can compute his taxes under the new scheme and the old scheme and pay such tax which is lower of the two.”
This amendment responds to concerns following the Budget 2024 announcement by FM Nirmala Sitharaman, which included the withdrawal of indexation benefits and a reduction in LTCG tax from 20% to 12.5%. The decision to remove indexation benefits, aimed at simplifying the tax regime, was met with criticism, especially from the middle class and real estate sector. Critics argue that this could lead to higher tax burdens and potentially increase cash transactions in the real estate market.
Real estate stocks experienced a decline following the July 23 announcement, reflecting investor apprehension over the potential impact of the changes. Revenue Secretary Sanjay Malhotra had previously defended the removal of indexation benefits, highlighting that other asset classes do not benefit from such adjustments and positioning the move as a simplification measure.
This amendment reflects the government's response to concerns over the initial proposal and aims to provide a fairer approach to LTCG taxation, balancing simplification with taxpayer relief.
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