The government relaxed the rules for property owners

Delhi Delhi. The government has introduced a relief measure for taxpayers affected by the recent changes made to the long-term capital gains tax on property. Earlier this year, the Union Budget 2024 had reduced the tax rate on long-term capital gains from 20% to 12.5% ​​but removed the indexation benefit, which adjusted the purchase price of a property for inflation. This change was expected to increase the tax burden on many property owners. “This change significantly impacted real estate owners. Those who had made significant gains in the short term benefited as their tax was reduced in the new proposal. But those who had owned real estate for a long time would likely be liable for more tax. This significantly benefited investors in real estate and penalised those who bought real estate for their own use. The government has now revised the proposal to allow indexation of real estate acquired before July 23, 2024,” said Ankit Jain, partner, Ved Jain & Associates. In response to public outcry, the government has now allowed taxpayers to choose from two options: Option 1: Pay 20% tax on capital gains after adjusting the purchase price for inflation (indexation). Option 2: Pay 12.5% ​​tax on capital gains without indexation adjustment. Taxpayers can choose that option.

Resulting in reduced tax liability. However, this relief will be applicable only to properties purchased before July 23, 2024. “July 23, 2024 will be considered as the cut-off date and in a way, properties (primarily immovable assets like land and buildings) purchased before this date will get grandfathering benefit. If you have purchased your property before this date, you are eligible to take the benefit and can choose between the old and new tax regime, either 12.5% ​​without indexation or 20% with indexation, whichever is more beneficial to the taxpayer. So, this gives you the shield to limit your capital gains tax liability under the old tax regime with indexation, if your tax liability under the new rate without indexation is going to be higher,” said Ritika Nayyar, partner, Singhania & Co. This change provides flexibility to property owners and ensures that they are not adversely affected by the removal of indexation benefit. Jain explains with the following examples: If you had purchased your property in 2002, then you can buy your property in 2003. If you bought a property for Rs 1 crore and sold it in 2024 for Rs 5 crore, you can choose between: Paying 20% ​​tax on the adjusted profit after considering inflation. Paying 12.5% ​​tax on the entire profit of Rs 4 crore. Case 1: In Case 1, a property was bought on January 1, 2002 for Rs 1,00,00,000 and sold on August 1, 2024 for Rs 5,00,00,000. The profit without indexation is Rs 4,00,00,000, resulting in a tax of Rs 50,00,000 at the rate of 12.5%. When considering the indexed cost, which is Rs 3,63,00,000, the profit after indexation is Rs 1,37,00,000.

The tax on these indexed gains at the rate of 20% is Rs 27,40,000. Therefore, the tax payable is Rs 27,40,000, as it is the lower of the two calculated tax amounts. In Case 2, an asset was purchased on January 1, 2015, for Rs 1,80,00,000, and sold on August 1, 2024, for Rs 5,00,00,000. The profit without indexation is Rs 3,20,00,000, resulting in a tax of Rs 40,00,000 at the rate of 12.5%. When considering the indexed cost, which is Rs 2,72,25,000, the profit after indexation is Rs 2,27,75,000. Therefore, the tax payable is Rs 40,00,000, as it is the lower of the two calculated tax amounts. “It is pertinent to note that this revised proposal only provides relief to taxpayers on account of any additional tax burden that may arise as per the proposed regime. It does not provide the taxpayer with an option to compute capital gains tax liability under either the old or the new regime. As a result, if computing capital gains under the old regime results in a loss, the taxpayer will not be allowed to recognise the same in his return,” said Kunal Savani, Partner, Cyril Amarchand Mangaldas. Important points to remember: This change applies only to capital gains from sale of property.

Taxpayers cannot choose between the old and new regimes. The government will determine the applicable tax based on the calculation.If the old regime results in a loss, the taxpayer cannot claim this loss under the new regime.Overall, the government's move aims to balance the need for tax revenue with taxpayers' concerns about the impact of removing indexation benefits. Shishir Baijal, Chairman and Managing Director, Knight Frank India, said, “The government has decided to allow taxpayers to choose between a 12.5% ​​tax rate without indexation or a 20% rate with indexation on long-term real estate transactions (acquired before July 23, 2024), which provides flexibility for sellers, who can now choose the option best suited to their financial situation and the extent of appreciation of their property. While the 12.5% ​​rate may look immediately attractive, the decision to choose it or the 20% rate with indexation should be made after careful consideration of individual circumstances. Ideally, if the value of a property has significantly outpaced inflation, the 12.5% ​​rate may be more beneficial. However, indexation may be beneficial in cases where property appreciation is close to the inflation rate.”