Indexation under LTCG on immovable properties – Govt takes away benefit of cost inflation indexation for Income Tax levy

Indexation under LTCG on immovable properties – Govt takes away benefit of cost inflation indexation for Income Tax levy

Summary: The Budget 2024 has proposed a significant change to the taxation of long-term capital gains (LTCG) on immovable properties by eliminating the cost inflation indexation benefit previously used to adjust purchase prices for inflation. While the tax rate on LTCG has been reduced from 20% to 12.5%, the removal of indexation means that any gains from sales after July 23, 2024, will be taxed at 12.5% without this adjustment. For properties bought on or before April 1, 2001, individuals can still use the fair market value as the cost of acquisition. In response to opposition and concerns from investors, the Finance Minister introduced an optional scheme allowing taxpayers to choose between the old 20% rate with indexation or the new 12.5% rate without. This option is only available for properties acquired before July 23, 2024. The removal of indexation benefits is expected to discourage property investment by increasing the tax burden on real estate transactions, particularly impacting investors and causing potential discrepancies with collector rates, which may not align with actual market values.

The Budget 2024 has proposed removing indexation benefits on capital gains from the sale of long-term capital assets, for the purposes of levy of income tax. Earlier, the cost of the sold property was  adjusted by calculating the  purchase prices as per the cost inflation index, reducing taxable profits. The tax rate on long-term capital gains for both financial and non-financial assets has been reduced from 20% to 12.5%. However, the indexation benefit for the sale of long-term assets has been removed. As a result, any sale of long-term assets after July 23, 2024, will be taxed at 12.5% without the indexation benefit.

Individuals can still use the fair market value (FMV) as the cost of acquisition for assets purchased on or before April 1, 2001, when selling these assets.

After uproar of the opposition in the Lok Sabha and the voices raised by the real estate investors and tax professionals, the Finance Minister has introduced the optional scheme. Under this new scheme, the taxpayer can opt either for payment of tax at the rate of 20% under the old cost indexation scheme or at the rate of 12.5% without indexation. However, the option is available only in respect of the properties bought on or before 23^rd July, 2024. Though the new amendment has provided some relief to the taxpayers who acquired the property earlier to this date, but the said relief has not been extended to the properties bought after this date. Thus, the relief given by the amendment is only partial and will be onerous for the further transactions of the proplerties.

This new provision of removal of the indexation benefit will likely discourage property investment. Removing indexation benefits on real estate sales will increase taxes on long-term capital assets. The overall impact will vary based on the type of investment. For individuals investing in property for personal use or as an investment, this change will have a negative impact. However, for individuals purchasing property as part of their business operations, gains from such sales will be treated as business income, so this change will not affect them.

However, it may be noted that the removal of the indexation benefit will be un-favourable to the real estate investors. It will not only increase the burden by way of actual rise of the prices in the market value and thus deprivation of the benefit of the indexation to cover up the reduced value of the rupee due to inflation, but it will also put extra burden on the taxpayer by way of upward revision of the Collector rates, which are sometimes not related to the fair market price rise of the property. The stamp duty is a State subject, and many a times, the Governments of the State in order to upsurge their revenue from stamp duty, increase the collector rates, which are not commensurate with the actual price rise of the properties. Further, there are many a cases, where the actual market rate of the property is below the collector rates fixed, though mostly the collector rates are lower than the fair market prices. But in the cases related to the low price rise of the property vis a vis the upward revision of the collector rates, the investor will be double penalised by paying the higher income tax. For example, the States of Punjab, had raised the collector rates for the properties.

Collector rates do not always reflect the real market condition. For example the 100% increase in certain cities ( for example in Patiala, Punjab) appears to be beyond justification and expectation, under any circumstances. It appears that either the collectors are very subdued or have been unexpectedly and unrealistically raised. Recently Haryana CM has rejected the proposal of the revenue department to raise the collector rates by 20 to 30% also shows that the decisions on collector rates are more or less political decisions. The June 2024 rejection in Haryana shows that the decision may be based on the upcoming State Assembly elections by the BJP Government, which has to face the anti-incumbency and farmer alienation in election. The real estate investors in Haryana may take a sigh of relief for the time being, but sooner or later the circle rates will be revised let the elections be completed.

So, the new regime of taxation by removing the indexation benefit even w.e.f 24^th July, 2024 is going to be detrimental to the investors and the real estate business already suffering from low growth due to the various economic reasons is likely to be adversely effected.