Capital gains tax changes bring great relief to homeowners: 12.5% ​​capital gains tax or 20% tax with indexation, which will reduce tax expenditure?

The Union government is set to amend the long-term capital gains (LTCG) tax provisions for immovable property proposed in Budget 2024 and give property owners an option to opt for a tax-friendly regime. Finance Minister Nirmala Sitharaman, in Budget 2024, had proposed to reduce the LTCG tax on immovable property from 20% to 12.5%, while removing the indexation benefit. This came as a major blow to property owners as indexation allows taxpayers to adjust the initial purchase cost for inflation before calculating capital gains, thereby reducing the overall tax outlay.

New changes in real estate capital gains tax: Finance Bill amendments you need to know

After much debate on social media platforms and representations from various stakeholders in the real estate sector, the Union government has offered two options to the property owners. According to the Finance (No. 2) Bill, 2024 introduced in the Lok Sabha, “Provided further that in case of transfer of a long-term capital asset, namely land or building or both, acquired before 23rd July, 2024, where the income-tax computed under section (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they existed immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be disregarded.”

What are the changes brought about by the proposed amendments? Shrinivas Rao, FRICS, CEO, Vestian, explains: “Property buyers who acquired a property before July 23, 2024, will have the option to choose between the new rule (12.5% ​​tax without indexation) and the old rule (20% tax with indexation) to ensure a lower tax liability.”

Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory, says, “The grandfathering clause in this context ensures that properties purchased before the specified date (July 23, 2024) are not adversely affected by the new rules. It allows taxpayers to calculate their taxes under both the new and old regimes and pay the lower amount, thereby preserving investments made under the previous tax assumptions.”

In simple terms, owners will now have two options to sell their property and they can choose the one that will impose the least tax on them:
1) Calculate the long-term capital gains tax on the sale of real estate at 20% after taking into account the benefit of indexation.

2) Calculate long-term capital gains tax on sale of real estate at 12.5% ​​without considering the indexation benefit. Anuj Goradia, Director, Dosti Realty, says, “The new rule empowers consumers, allowing home sellers and buyers to choose the clause that minimises their tax burden.”

New Real Estate Capital Gains Tax: Two Options for Homeowners — Who’s Eligible?

Who will be eligible for these options? Vivek Rathi, National Research Director, Knight Frank India, explains:
1) Individuals or Hindu Undivided Families (HUFs) who have purchased houses before July 23, 2024 are eligible.
2) Choice is available for both residential and commercial properties.

Two LTCG taxes on real estate: Key things landlords should keep in mind when choosing their regime

Kale says, “Basically, even under the revised proposal, taxpayers (individuals and HUFs) would have the option to opt for the indexation benefit, only in case of long-term capital gain on transfer of land or building acquired before July 23, 2024, if such tax treatment is more advantageous (lower tax outlay) as compared to the proposed tax treatment (12.5% ​​without indexation).”

“The Union government has ensured simplicity of tax calculation in the hands of the seller of the property by providing an option to choose any of the capital gains tax calculation methods, whichever entails lower tax liability,” says Vimal Nadar, Senior Director and Head of Research, Colliers India.

LTCG tax on real estate: 20% LTCG tax with indexation or 12.5% ​​LTCG tax without indexation, which will reduce your tax expenditure?

20% LTCG with indexation or 12.5% ​​LTCG without indexation: Which regime will save you more tax? Answering this question, Rathi says, “The choice between using the indexation benefit or opting for the new 12.5% ​​LTCG tax rate depends on your specific financial situation and the amount of capital gain you have made.”
According to experts, the tax liability will vary on a case-by-case basis, depending mainly on how long the asset has been held and the size of the capital gain. According to Bothra, “The decision whether or not to opt for the benefits of indexation should be made on a case-by-case basis, taking into account factors such as the purchase price of the property, the age of the property and price growth, among others. Eligible individuals should calculate their potential tax liabilities under the old and new regimes to determine which option is more advantageous before making a decision.”

Let’s take an example: Suppose A bought a property in 2001 for Rs. 10 lakhs. He sells it in 2024. How much tax will he have to pay if he opts for the old LTCG rule – Long Term Capital Gains Tax of 20% with indexation benefits? Can he save tax if he opts for the new LTCG tax of 12.5% ​​without indexation? Find out here.

Assumptions: Year of purchase: 2001, Year of sale: 2024, Number of years: 23, Purchase price: Rs. 10,000,000, Old LTCG tax 20%, New LTCG tax 12.50%, CII in year of purchase 100, CII in year of sale 363
Source: Knight Frank

Rathi adds: “In an ideal scenario, if property values ​​have increased more than the rate of inflation, the new 12.5% ​​tax rate should be more advantageous for property sellers compared to the previous tax rate of 20% after adjusting for indexation.”

Echoing the same view, CA Prakash Hegde, Acer Tax & Corporate Services, says, “In general, we can say that when the speed of appreciation of property value is fast, a 12.5% ​​tax without indexation will be more beneficial, and when it is slow, a 20% tax with indexation will be more beneficial.”

Agarwal of The Guardians Real Estate Advisory says: “If the property has been held for a long period of time, such as several years or decades, and there has been significant inflation during that period, the benefit of indexation would be advantageous. Indexation increases the acquisition cost of the property, thereby reducing the capital gains and, consequently, the tax payable. If this adjusted cost results in a lower taxable gain, even at a 20% tax rate, then it is advantageous to opt for indexation.”

He adds: “If the property has been held for a shorter duration or inflation has been minimal during the holding period, the increase in cost due to indexation may not be significant. In such cases, the 12.5% ​​LTCG tax without indexation may be lower than the 20% tax with indexation.”