2001: The year that divides property sellers under new Budget tax rules
The government proposed reducing the long-term capital gains tax on immovable properties to 12.5 per cent from 20 per cent, but removed the indexation benefits.
Union finance minister Nirmala Sitharaman's budget speech outlined some changes to the direct and indirect tax regimes. Among the key highlights were alterations to the long-term capital gains (LTCG) tax for listed assets, the elimination of indexation benefits, and the removal of the angel tax for investors.
One of the most striking changes pertains to the LTCG tax and indexation benefits, creating a distinct divide among property sellers based on the purchase or inheritance date of their properties, with 2001 being the critical year.
As per the Memorandum to the Union Budget, with rationalisation of rate to 12.5 per cent, indexation available under Section 48 of the Income Tax Act is proposed to be removed for calculation of any LTCG, which is presently available for property, gold and other unlisted assets.
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Replying to media queries on the Budget proposal, Finance Secretary T V Somanathan said the indexation benefit will be applicable on properties bought before 2001.
Union budget 2024-25 has effectively split property sellers into two categories: properties purchased or inherited before 2001; and properties purchased or inherited in 2001 or later, reported The Times of India.
Sellers in the first category continue to benefit from indexation, which adjusts the purchase price of the property for inflation, thus reducing taxable gains. They will also enjoy a reduced LTCG tax rate of 12.5%, down from the previous 20%.
{{/usCountry}}Sellers in the first category continue to benefit from indexation, which adjusts the purchase price of the property for inflation, thus reducing taxable gains. They will also enjoy a reduced LTCG tax rate of 12.5%, down from the previous 20%.
{{/usCountry}}Sellers in second category lose the benefit of indexation, meaning their capital gains will be calculated based on the actual purchase price and sale price without any inflation adjustment. They too benefit from the lowered LTCG tax rate of 12.5%, but without the cushioning effect of indexation.
{{/usCountry}}Sellers in second category lose the benefit of indexation, meaning their capital gains will be calculated based on the actual purchase price and sale price without any inflation adjustment. They too benefit from the lowered LTCG tax rate of 12.5%, but without the cushioning effect of indexation.
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{{/usCountry}}Indexation is a method that allows investors to adjust the buying price of their assets to account for inflation, thereby reducing the taxable profit when they sell. For instance, an apartment bought before 2001 can have its value adjusted to reflect April 2001 prices, thanks to indexation, and then further gains will be taxed at the new lower rate of 12.5%.
{{/usCountry}}Indexation is a method that allows investors to adjust the buying price of their assets to account for inflation, thereby reducing the taxable profit when they sell. For instance, an apartment bought before 2001 can have its value adjusted to reflect April 2001 prices, thanks to indexation, and then further gains will be taxed at the new lower rate of 12.5%.
{{/usCountry}}However, an apartment purchased in 2003 will see its capital gains calculated solely based on the difference between the purchase price and the sale price, without any inflation adjustment, but at the new 12.5% LTCG rate.
Somanathan asserted that the changes would not adversely impact the majority of property sellers.
"In 95 per cent cases, this 12.5 per cent will benefit. Due to this change, the middle class will benefit," he said.
Deloitte India Partner Aarti Raote said the taxability of LTCG without indexation will have significant impact on taxpayers.
"The indexation benefit was provided to increase the cost of the asset to the current value and the gain is then computed against the sale consideration. However, now the taxpayers will pay tax on the difference between the actual cost and the sale consideration, which will be significant," she said.
Anupama Reddy, Vice President and Co-Group Head (Corporate Ratings), ICRA, too, said considering the long-term returns on the residential real estate sector, despite a reduction in the LTCG tax rate, the removal of indexation benefit at the time of sale of property is likely to result in a higher tax outgo.
"Hence, this is negative for the sector," Reddy added.
With inputs from agencies
