Government Plans to Relax Long-Term Capital Gains Tax on Property Sales

The Narendra Modi government is moving forward with plans to relax the long-term capital gains tax on property sales, a key proposal outlined in the Union Budget 2024. This significant policy shift is expected to have wide-ranging implications for property owners and the real estate market, as well as the broader economy.

According to a report, under the new proposal, individuals, and Hindu undivided families (HUFs) who transfer long-term capital assets—such as land, buildings, or both—acquired before July 23, 2024, will have the flexibility to compute their taxes using one of two methods. They can either opt for the new tax scheme, which imposes a 12.5% tax without the benefit of indexation, or stick with the old scheme, which taxes at 20% but allows for indexation. Taxpayers can then choose to pay the lower amount between the two options, potentially offering significant tax savings.

This proposal comes on the heels of Finance Minister Nirmala Sitharaman's budget announcement, which revealed plans to increase both long-term and short-term capital gains taxes. Notably, the government has also proposed eliminating the indexation benefit for property sales. Indexation is a tool that adjusts the purchase price of an asset for inflation, effectively lowering the capital gains and the associated tax burden. By removing this benefit, the government aims to simplify the tax computation process, although it could lead to higher taxes for some property owners.

In terms of specifics, the short-term capital gains tax is set to increase from 15% to 20%, reflecting a more aggressive taxation approach for assets held for shorter periods. On the other hand, the long-term capital gains tax will be standardized at a flat rate of 12.5%, regardless of the duration of ownership, provided taxpayers opt out of indexation.

Real Estate and Tax Experts React to the Reforms

The government's decision to overhaul the capital gains tax structure has been met with a positive response from real estate and tax professionals. These experts recognize the potential benefits of the changes, particularly in terms of providing clarity and easing the tax burden on taxpayers in specific situations.

Gaurav Karnik, Partner and Real Estate National Leader at EY India, welcomed the move, noting that it offers much-needed relief to taxpayers. He explained, "This change addresses situations where taxpayers might have been required to pay higher taxes, even when, on an indexed basis, there was no real gain. The flexibility to choose between the new and old tax schemes ensures that taxpayers are not unfairly penalized by inflation, which is a significant advantage."

Vivek Jalan, Partner at Tax Connect Advisory, also underscored the importance of these reforms. He pointed out the potential challenges posed by retrospective taxation, which can create uncertainty and disrupt the financial planning of taxpayers. "Retrospective taxation creates uncertainty and can destabilize a taxpayer's financial standing. The long-term capital gains (LTCG) tax for real estate previously benefited from inflation-adjusted indexation, where the LTCG would be 20% after considering the indexed cost of acquisition and improvements," Jalan explained.

However, Jalan also pointed out the potential drawbacks of the reforms. "As of July 23, 2024—the date the Union Budget was announced—indexation has been removed for even older properties, in an effort to simplify tax calculations. Additionally, the LTCG rate without indexation has been increased from 10% to 12.5%," he added. These changes could lead to higher tax liabilities for some property owners, particularly those who had acquired properties before the cutoff date with specific tax planning strategies in mind.

Jalan further elaborated on the broader implications for the real estate sector, noting that the new tax changes could significantly impact property sellers, especially those who purchased properties before July 23, 2024. "This will significantly affect property sellers, especially those who purchased properties before July 23, 2024, with tax planning in mind. As a result, the real estate industry, a major employment generator in the economy, could be severely impacted," he said. Jalan also suggested that the government might consider applying the changes prospectively for properties bought after July 23, 2024, to mitigate the impact on existing property owners.

Niranjan Hiranandani Praises Government Initiative

Niranjan Hiranandani, chairman of the Hiranandani Group and NAREDCO, also expressed strong support for the government's initiative. He emphasized the significance of allowing taxpayers to choose between the two tax schemes, describing it as a major advancement in tax policy. "Allowing taxpayers the option to calculate taxes at either 12.5% without indexation or 20% with indexation on real estate transactions is a significant advancement," Hiranandani stated.

He further clarified that this relief is applicable to the transfer of long-term capital assets, including land or buildings, that were acquired before July 23, 2024. By enabling taxpayers to choose the lower tax burden between the new and old schemes, Hiranandani believes the amendment will drive investment and boost sales across various housing segments. By allowing taxpayers to choose the lower tax burden between the new and old schemes, this amendment is anticipated to encourage investment and drive sales across different housing segments. he added.

The proposed changes to long-term capital gains tax on property sales represent a significant shift in India's tax landscape. While the reforms aim to simplify the tax computation process and provide relief to taxpayers, they also introduce new challenges, particularly for those who had planned their investments under the previous tax regime. As the real estate sector and taxpayers adjust to these changes, it will be crucial to monitor their impact on the market and the broader economy.