Compute tax either at 12.5% without indexation or 20% with indexation on realty transactions: Govt proposes amendment

In a big relief to real estate industry, Finance Minister Nirmala Sitharaman will move an amendment in the Finance Bill to let taxpayers select either 12.5 per cent LTCG rate without indexation or 20 per cent rate with indexation for property acquired before July 23, 2024.

As per the amendments to Finance Bill, 2024, circulated to the Lok Sabha members on Tuesday, individuals or HuF who bought houses before July 23, 2024, can compute his/her taxes under the new scheme [@12.5 per cent without indexation] and old scheme [@20 per cent with indexation] and pay such tax which is lower of the two.

The development of Prime Minister Narendra Modi-led government comes after facing backlash from the real estate sector. The stakeholders cautioned the Centre on indexation proposal introduced in Budget 2024 will hurt the growth of the sector.

In Budget 2024 presented by Finance Minister Nirmala Sitharaman, the government proposed eliminating indexation benefits for homeowners.

Indexation rule in Budget 2024:
In the recently Union Budget by Sitharaman, it was proposed to slash LTCG tax on property to 12.5 per cent from 20 per cent, while removing the benefit of indexation for properties purchased on or after April 1, 2001. Indexation allow taxpayers to adjust the acquisition cost for inflation before computing capital gains, thereby bringing down the overall tax outgo. A Cost Inflation Index (CII) is notified by the Central Board of Direct Taxes for its computation. There were worries about the retroactive impact for taxpayers

Previously, indexation benefits allowed homeowners to increase the property’s cost basis to account for inflation, thereby reducing the net profit and the associated tax liability.Earlier, ET had reported that higher tax rate with indexation or a lower rate of 12.5% without indexation, as well as some form of grandfathering for ancestral properties are proposed. The suggestions are being examined at the finance ministry and will be discussed with the Prime Minister’s Office, people familiar with the matter told ET.The finance ministry held one round of discussions on the concerns raised in several quarters over the move, including a possible rise in black money transactions.

The Lok Sabha has begun discussion on the Finance Bill after the Appropriation Bill for the central government’s expenditure for 2024-25 was passed by the House on Monday.

The passage of the Finance Bill by Parliament will complete the budget process.