In the 2024 Budget, Finance Minister Nirmala Sitharaman proposed a reduction in the long-term capital gains (LTCG) tax rate on property sales from 20% to 12.5%, but this change came with the elimination of the indexation benefit. Indexation allows taxpayers to adjust the original purchase price of a property for inflation before calculating capital gains, thereby reducing the overall tax burden. This proposal had significant implications for homeowners.
After widespread discussions and input from stakeholders in the real estate industry, the Union government has provided homeowners with two options. Here’s what you need to know about the recent changes to capital gains tax on property.
Amendments in Finance Bill 2024
As per the Finance (No. 2) Bill, 2024, introduced in the Lok Sabha, a provision states: “In the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd of July 2024, where the income tax computed under item (B) exceeds the income tax computed in accordance with the provisions of this Act as they stood immediately before their amendment by the Finance (No.2) Act, 2024, such excess shall be ignored.”
This amendment allows taxpayers to choose between two LTCG tax options for properties acquired before July 23, 2024: a 12.5% rate without indexation or a 20% rate with indexation.
Two Capital Gains Tax Options Now Available
Homeowners now have the flexibility to select the option that results in a lower tax liability when selling their property.
Option 1: Calculate the tax on long-term capital gains at 20% after applying the indexation benefit.
Option 2: Calculate the tax on long-term capital gains at 12.5% without the indexation benefit.
Eligibility for These Options
Individuals or Hindu Undivided Families (HUFs) who purchased houses before July 23, 2024, can choose between the two LTCG tax regimes. This choice is available for both residential and commercial properties.
The new law applies to all Indian citizens and HUFs but excludes non-resident Indians (NRIs), companies, and limited liability partnerships (LLPs),.
Taxpayers, including individuals and HUFs, can choose the option that provides a more favorable tax treatment, ensuring that their tax liability is minimized when selling properties acquired before July 23, 2024.
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