In the Budget 2024-25, the finance minister removed the indexation benefit from the long-term capital gain (LTCG). It was done along with the simplification of capital gain taxation. However, several concerns were raised about the removal of indexation benefits from the real estate sector. Multiple members of parliament also voiced their concerns about it after the budget announcement. Now, according to a CNBC TV18 report, the government is exploring options regarding indexation and its implementation in the real estate sector.
The finance minister has reduced the LTCG from 20 per cent to 12.5 per cent but at the same time also removed the indexation benefit. Indexation benefit is when the purchase price or the cost of the asset is adjusted for inflation which as a result reduces the capital gain. A lesser gain means a lesser tax liability. So, indexation has been a huge relief to taxpayers, especially for properties because people don’t sell property so frequently like other investments. It would result in more savings in taxpayers’ hands.
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However, the removal of indexation from real estate would mean more gain and more tax burden for taxpayers. Besides there are other nuances as well in real estate raising people’s apprehensions, like the highest taxation would mean people would use more cash in real estate transactions which will ultimately be helpful.
The grandfathering rule is a provision to extend the benefit of the previous rule up to a certain date before a new rule is implemented. There is already a grandfathering rule for the mutual funds where a mutual fund purchased up to January 31, 2018, gets the benefit. Such mutual fund investment’s purchase price is adjusted according to the defined grandfathering rule. But it does not apply to the real estate.
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Reportedly, the government may also allow taxpayers to choose between tax regimes (old and new) for real estate transactions. The choice of selecting a regime for real estate would offer taxpayers more flexibility to select the most suitable option financially.
However, it is important to note that the amendment demands are primarily for real estate transactions. Therefore, any changes the government makes or relief it provides would be for the real estate industry. Seemingly, the decision to remove indexation may not be reversed, but some measures may be taken to ease the impact. Since concerns and demand for change are coming from all industries, the finance minister may address this in her response to the Finance Bill.
