Summary: Budget 2024 brought significant changes to the indexation benefit for Long Term Capital Gains (LTCG) on property sales, reducing the indexation rate from 20% to 12.5%. This change impacts the calculation of taxable gains by adjusting the property’s purchase price for inflation, which could potentially increase tax liability for sellers. In response to public backlash, the government introduced an amendment allowing property owners who purchased their property before the Budget announcement but sold it afterward to choose between a 12.5% LTCG rate without indexation or a 20% rate with indexation. However, the indexation benefit was completely removed for properties sold after the Budget announcement. This abrupt change poses challenges for property investors, making real estate less appealing due to higher taxes. Investors may seek alternative investments with lower tax implications or carefully time their property sales to optimize tax benefits. The elimination of indexation could also negatively impact the real estate market, reducing property sales. Therefore, property owners should stay informed about these changes and consider professional tax advice to navigate the new tax landscape effectively.
Understanding the Indexation Benefit
Indexation refers to the process wherein the cost of an asset is adjusted on account for inflation. In calculating Long Term Capital Gain (LTCG) for property sale, the indexation concept helps property owners to reduce their taxable capital gains by increasing the purchase price of the property to reflect the rise in prices over time.
Long Term Capital Gain (LTCG)
Section 45 of the Income Tax Act, 1961, defines LTCG. It states that long-term capital gain is profit or gain arising from the transfer of a capital asset. Such gain or profit adds on the income of the year in which the transfer took place, and the same will be chargeable to income tax under the head ‘Capital Gains.
Section 2 (29A) of the Income Tax Act, 1961 defines that a capital asset held for more than 36 months immediately preceding the date of its transfer shall be considered as a long-term capital asset. However, for immovable property and unlisted shares the period of holding is 24 months. For listed equity shares, the period of holding is 12 months. Generally, the period ranges from 1-3 years.
The Budget 2024 Shock
Under Budget 2024, the indexation benefit for property sales was reduced to 12.5% from 20%. However, the backlash from the people made the government introduce an amendment wherein an option has been given to people who have purchased property before Budget 2024 but sold after the Budget. The proposed amendment allows taxpayers to choose between a 12.5% LTCG rate without indexation or a 20% rate with indexation for properties acquired before July 23, 2024.
But, the indexation benefit was removed immediately for all properties sold after the Budget announcement.
Effects on Investors
1. The tax calculated without indexation will be higher.
2. The people will reduce investing in property because of more taxation, thus property investment will be less appealing.
3. This will have a negative impact on the sales of property in the real estate market.
What Can Property Investors Do?
1. The potential investors will look for other investment options that attract less taxes or reduce the tax liability.
2. Timing the sale of property such that to take advantage of indexation.
3. To seek professional advice of a qualified tax professional.
For real estate investors, Budget 2024’s elimination of indexation advantages for property transactions is a double-edged sword. While the progressive phase-out for homes bought prior to the Budget offers a brief window of opportunity to potentially lower tax payments, the abrupt elimination for houses sold after the Budget release is a serious setback. Property owners must be aware of these developments and take the necessary action to handle their tax situations.
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