Relief for homeowners: Govt to restore indexation benefit for property

New Delhi: The government is set to introduce some flexibility in computing capital gains tax on immovable property by amending the Finance Bill 2024 presented last month, in what would come as a relief to taxpayers and to the real estate industry.

Finance minister Nirmala Sitharaman is expected to propose amendments to the provisions of the Bill on Wednesday in Parliament in order to offer the tax relief, a person with knowledge of the development said.

The plan is to allow those selling assets bought before 23 July 2024 to compute their capital gains tax obligation in either the earlier or the new tax schemes, whichever suits them. This restores the indexation benefit available on sale of property.

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“In the case of transfer of a long-term capital asset such as land or building acquired prior to 23 July, 2024, the taxpayer can compute his tax either at 12.5% without indexation—the new scheme—or at 20% with indexation, the old scheme, and pay such tax that is lower of the two,” said the person, who spoke on condition of anonymity.

A rollback

This is a roll back of the withdrawal of the indexation benefit, explained Amit Singhania, managing partner at Areete Law Offices.

“If the tax payable under the new regime (without indexation benefit) at the rate of 12.5% exceeds the tax payable under the old regime (with indexation benefit) at the rate of 20% then, such excess shall be ignored," said Singhania.

An email sent to the finance ministry on Tuesday seeking comments for the story remained unanswered at the time of publishing.

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Indexation benefit refers to adjusting the purchase price of an asset for inflation while computing the capital gains tax. This helps reduce the tax burden on the seller. The indexed purchase price is calculated using a cost inflation index (CII).

Niranjan Hiranandani, chairman of Hiranandani Group and NAREDCO, applauded the move, calling it a significant step forward.

“By enabling taxpayers to choose the lower tax burden between the new and old schemes, the amendment is poised to drive investment and enhance sales across housing segments," said Hiranandani. "We are grateful for the finance minister's forward-thinking approach in implementing these beneficial measures.”

Amended in budget

In the budget presented in Parliament on 23 July, the government had proposed to amend the capital gains tax structure, but the removal of the indexation benefit led to calls from investors for its restoration, saying the lower tax rate proposed in the bill without indexation may not benefit the sellers in all circumstances.

Separately, the amendments to the finance bill, however, propose to take away the benefit of neutralisation of foreign exchange fluctuation from foreign investors along with the increase in tax rate from 10% to 12.5%, showed the notice of amendments proposed to the bill, a copy of which was seen by Mint.

The finance bill had initially proposed to allow neutralisation of the foreign exchange fluctuations for foreign investors while computing their capital gains.

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The Centre is proposing as many as 45 amendments to the finance bill. The changes come after it held extensive consultations with the industry after the budget announcements.

Sitharaman, who moved the finance bill for passage in the Lok Sabha on Tuesday, is expected to give her reply to the discussion on the bill on Wednesday. Some opposition members of the House sought tax relief for the middle class during the discussion on Tuesday.

Simplifying and rationalising the tax regime is a priority for the government. The finance minister had in her budget speech announced a comprehensive review of the Income Tax Act, which is expected to be completed in six months.

Madhurima Nandy in Bengaluru contributed to this story.