The proposed changes to long-term capital gains (LTCG) taxation on real estate transactions, the Indian government is considering modifications that could alleviate some of the anticipated tax burden. Sources familiar with the ongoing deliberations suggest that the new LTCG regime may be implemented from April 1, 2025, rather than the initially proposed date of July 23, 2024.
Additionally, the government is contemplating retaining some form of indexation benefit or adjusting the cut-off date for its removal. These potential adjustments may be introduced through amendments to the Finance Bill 2024, which is slated for discussion in the Lok Sabha this week. Despite these possible changes, the government is expected to maintain the revised LTCG tax rate of 12.5%. Indexation benefits have historically allowed property sellers to adjust the cost of their assets for inflation, thus reducing taxable gains.
The proposed removal of indexation has raised concerns about a potential decline in net gains from property sales, which could lead to reduced demand and fewer transactions in the real estate market. However, government officials and experts argue that the impact of the new regime might not be uniformly adverse. In high-growth areas where property values appreciate significantly, the revised tax framework could potentially be more advantageous for taxpayers.
According to the Income Tax department, typical real estate returns range from 12-16% per annum, which often exceeds inflation rates. As such, the removal of indexation might not always result in increased tax liabilities. “There is an understanding that nominal returns from real estate investments are not consistently in the 12-16% range across all markets. Therefore, some relief measures may be considered,” an official stated. The government is exploring whether taxpayers might be given a choice between the old tax regime—offering a 20% LTCG rate with indexation benefits—and the new regime, which proposes a lower 12.5% rate without indexation. This would allow individuals to select the option most beneficial based on their specific circumstances.
A spokesperson from EY India suggested that, “The government may provide taxpayers with the option to choose between the 20% LTCG rate with indexation or the 12.5% rate without it, depending on which yields a better outcome.” Similarly, Nangia Andersen LLP highlighted that, “The new LTCG tax regime could be beneficial in many scenarios, but a thorough analysis may lead to the introduction of a choice between the old and new tax regimes for properties acquired before April 1, 2001.”
