The Finance Bill 2024 has extended the indexation benefit in Long-Term Capital Gain (LTCG) to properties bought before July 23 this year. Homeowners can now choose 12.5 per cent LTCG without indexation in the new tax regime or 20 per cent LTCG with indexation in the old regime. In her Budget speech last month, Union Finance Minister Nirmala Sitharaman proposed reducing the LTCG from 20 to 12.5 per cent and removing the indexation benefit from LTCG to simplify the tax rules. However, this decision has triggered a public debate over its implication. Some parliamentarians have voiced concerns about whether it will adversely impact ordinary citizens.

So, what is Indexation? It allows the adjustment of the property’s purchase price with inflation that increases the asset’s final cost, while reducing the capital gain. Let’s unpack this in detail.

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The Indexation Option In LTCG

Dhruv Chopra, managing partner of Dewan P. N. Chopra & Company, a CA firm, says, “The relaxation applies to individuals and HUFs (Hindu undivided families) and not corporates, LLPs, and non-resident individuals. The implications will be that LTCG tax on the transfer of immovable property acquired before July 23, 2024, will be lower of tax computed under new law, i.e., 12.5 per cent without indexation and old law, i.e., @20 per cent after indexation. This grandfathering benefit is allowed for immovable properties purchased before July 23, 2024.”

In short, property owners now have the option to calculate LTCG on properties bought before July 23, 2024, at 20 per cent with indexation or 12.5 per cent without indexation. However, any property purchased after this date will attract an LTCG tax of 12.5 per cent without indexation.

So, could the amendment to the LTCG rule affect home buyer’s decisions? Chopra opines, “Investors will continue to invest in immovable properties for long-term wealth creation irrespective of tax amendments. However, there may be a slight change in the price of properties to attract investors if the RE (real estate) market slows down due to tax implications.”

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Conclusion

Properties bought after July 23, 2024, or inherited in future will not get the indexation benefit. However, the LTCG tax will depend on the property’s capital appreciation during the sale. Hence, the tax incidence will depend on factors like capital appreciation during the holding period, acquisition cost, etc.