Published Jul 25, 2024 | 11:00 AM ⚊ Updated Jul 25, 2024 | 11:00 AM
Property tax representational image (iStock)
In the Union Budget presented by Minister Nirmala Sitharaman, important announcements were made that brought in changes to long-term capital gains taxation. It included the removal of indexation benefits for capital gains tax on real estate sales.
This move is bound to affect a lot of property owners.
At the same time, the Union Minister also reduced the long-term capital gains tax (LTCG) rate from 20% to 12.5%.
Indexation refers to the adjustment of the cost of an asset for inflation while calculating capital gains for taxation purposes in India. In real estate, this asset can be any property.
Property Indexation Calculation:
Indexed cost = Actual Purchase Price x (CII for the year of sale/CII for the year of purchase)
* In income-tax parlance, CII stands for the Cost Inflation Index, which is used to assess the annual growth in the cost of goods and assets owing to inflation.
Indexation allowed taxpayers to account for the decreased value of money over time due to inflation. This reduced the taxable amount of capital gains and tax liability.
Example 1
In this case, the cost of acquisition was ₹4 lakh, and the property was sold for ₹44 lakh.
As per new taxation:
44,00,000- 4,00,000 = 40,00,000*12.5% = 5,00,000/-(Tax)
As per the previous taxation:
44,00,000-12,00,000 (By adding indexation) = 32,00,000*20% = 6,00,000/-(Tax)
Naveen Fernades, Chairman, BSE Administration and Surveillance Ltd, and Member, the Council of Financial Planners, said, “Barring some pockets, realty has appreciated little over the last decade or two, with 5 to 6% per annum being common.”
“These properties would not have inflation-adjusted gains, and so would not pay any tax under the old scheme. Under the new scheme they pay 12.5% tax on gains, effectively delivering negative inflation-adjusted gains to the seller,” he told South First.
Fernandes added that the new rate saves tax for those who make very high returns.
In a series of posts on X, after receiving criticism, the Income-Tax Department said that “Simplification of any tax structure has benefits of ease of compliance viz computation filing, maintenance of records. This also removes the differential rates of various classes of assets.”
Benefit of change in rate from 20% (with indexation) to 12.5% (without indexation) in real estate
✅The reduction in long term capital gains tax rate from 20% with indexation to 12.5 % without indexation for real estate will benefit in almost all cases.@nsitharamanoffc…
— Income Tax India (@IncomeTaxIndia) July 24, 2024
Explaining further, the department said, “The reduction in long-term capital gains tax rate from 20% with indexation to 12.5% without indexation for real estate will benefit in almost all cases.
“Nominal real estate returns are generally in the region of 12-16% per annum, much higher than inflation. The indexation for inflation is in the region of 4-5%, depending on the period of holding. Therefore, substantial tax savings are expected for a vast majority of such taxpayers,” it added.
Citing an example, the department claimed, “… it is clear that only where returns are low (less than about 9-11 percent per annum) that the earlier tax rate is beneficial but such low returns in real estate are unrealistic and rare.”
Satish BN, Managing Director, Skydealz India Property Services LLP, felt it was not a great move by the government.
“It is like trying to eat jamoon without sugar syrup. What you eat needs to taste good as well. In a nutshell, this is what the government has done to the real estate sector,” he told South First.
But with so much criticism, many are hopeful that the government will roll back these changes. But Satish does not believe so.
“I doubt. Have you ever seen any particular government rolling back in terms of whatever initiative they have taken, I do not believe they will roll it back,” he opined.
(Edited by Majnu Babu).
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