by 99Realty 
In a significant policy shift, the Government of India has proposed an amendment to the Finance Bill concerning the indexation benefits on real estate. This change is poised to provide relief to property owners by allowing them the option to choose between the new and old tax regimes for long-term capital gains (LTCG) on property purchases made before July 23, 2024.
Understanding Indexation and its Importance
Indexation is a crucial mechanism that adjusts the purchase price of an asset for inflation. This adjustment reduces the capital gains, thereby lowering the tax liability for the taxpayer. Previously, the Indian government had announced the withdrawal of indexation benefits for real estate, alongside reducing the LTCG tax rate from 20% to 12.5% in the Union Budget 2024.
Details of the Proposed Amendment
Key Provisions
The proposed amendment offers taxpayers the choice to compute their taxes under two different schemes:
- New Scheme: LTCG taxed at 12.5% without indexation.
- Old Scheme: LTCG taxed at 20% with indexation.
Taxpayers can opt for the scheme that results in a lower tax liability, thereby offering a flexible and potentially more favorable tax treatment.
Impacted Assets
The amendment specifically targets long-term capital assets such as land, buildings, or both, acquired before July 23, 2024. This ensures that taxpayers holding these assets can benefit from the advantageous tax computation method.
Also Read: Budget 2024: Analyzing the Impact on Urban Housing and Real Estate
Background and Rationale
Initial Decision and its Repercussions
Finance Minister Nirmala Sitharaman’s announcement in Budget 2024 to remove the indexation benefit aimed to simplify the tax regime. However, this decision faced significant backlash from various stakeholders, including the ruling Bharatiya Janata Party’s (BJP) core support base – the middle class. Concerns were raised that the removal of indexation would increase the cash component in real estate transactions, potentially reintroducing black money into the sector.
Market Reaction
The real estate market reacted negatively to the initial announcement, with a notable decline in real estate stocks. This market sentiment underscored the widespread apprehension regarding increased tax burdens on residential property owners under the new regime.
Government’s Response to Feedback
Addressing Concerns
In response to the feedback and concerns, the government’s amendment aims to mitigate the adverse effects by offering taxpayers a choice. This move is seen as a direct response to the pushback from the BJP cadres and the broader middle-class constituency.
Legal Framework
The amendment will be introduced in the Finance Bill tabled in the Lok Sabha. It is a strategic move to balance tax simplification with the need to support property owners and maintain stability in the real estate market.
Expert Opinions and Future Implications
Industry Experts’ Views
Industry experts have welcomed the amendment, highlighting that it provides much-needed relief to property owners. The option to choose between tax regimes ensures that taxpayers are not unfairly burdened and can optimize their tax liabilities.
Long-term Benefits
This amendment is expected to have long-term benefits for the real estate sector. By allowing indexation, the government supports the sector’s growth and stability, while also addressing the concerns of black money circulation.
The government’s decision to reconsider the removal of indexation benefits for real estate and offer taxpayers a choice between tax regimes is a prudent move. It balances the goals of tax simplification and taxpayer relief, ensuring that the real estate sector remains robust and attractive for investors.
