Reintroduced indexation benefit for property disallows loss offsets, excludes NRIs and companies

The recent amendment to long-term capital gains (LTCG) tax on real estate has brought some respite to property owners. Those who acquired real estate before 23 July 2024 now have the option to choose between a lower tax rate without indexation or a higher rate with indexation.

Property owners will have the option to pick between indexation with 20% tax and forgoing indexation for the lower 12.5% tax rate. For properties bought after 23 July, the 12.5% tax rate without indexation is applicable.

According to tax experts, only resident individuals and Hindu Undivided Families (HUF) are eligible for this option. The Notice of Amendment specifies that companies and LLPs are excluded from this relaxation.

A closer reading suggests that non-resident Indians (NRIs), too, don’t get the benefit of this partial rollback of indexation benefit, said Ajay R. Vaswani, founder, Aras and Company Chartered Accountants.

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Mayank Mohanka, founder of TaxAaram India and partner at S.M. Mohanka & Associates, agreed. "The Notice of Amendments specifically states that the revised provision is to be inserted after line 37 of page 39 in the Finance Bill, 2024, right after the clause for resident individuals and HUFs. The clauses for companies and non-residents have been excluded from this amendment," he explained.

Vaswani added that the final amendment should clarify this. “It is unlikely that the exclusion of these groups was a mistake. The amendment would have simply said 'applicable to all assesses' if that was the case.”

Tax experts warn that these limitations could significantly impact taxpayers, particularly NRIs who often face challenges in selling properties in India.

Many NRIs end up selling their properties at a lower price because it’s difficult to find buyers who can pay the full amount in cash, Vaswani noted. 

Additionally, NRIs face complexities in obtaining lower TDS certificates and 15CB certificates to remit sales proceeds abroad.

The Union Budget for 2024-25 had proposed to lower the LTCG from 20% to 12.5% but removed indexation benefits. The new rates came into effect 23 July 2024. The indexation benefit allowed taxpayers to compute gains arising out of the sale of capital assets after adjusting for inflation.

Indexation benefit was retained for properties bought or inherited before 2001.

Losses cannot be offset

The option of indexation applies only to gains, not losses. If a property is sold at a loss, owners cannot offset or carry forward this loss. However, they won't have to pay the 12.5% tax on properties sold at a loss after adjusting for inflation.

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The amendment notice states: "...where the income-tax computed under item (B) (the new LTCG tax regime) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment (the old LTCG tax rule)…, such excess shall be ignored.” 

This means if the tax liability at the 12.5% rate without indexation exceeds the 20% rate with indexation, the tax liability will be ignored in cases of capital loss.

Also read | How the Budget affects your LTCG tax on immovable property

Mohanka said long-term capital loss on properties acquired before 23 July will be a dead loss for property owners. “In effect, majority real estate owners no longer have the option to set-off or carry forward loss on property irrespective of whether it was bought before or after 23 July. Under the new 12.5% regime, unless you sell the property at the price lower than the cost of purchase, which is extremely rare in case of distressed sales, there will always be a gain and you will have to pay tax,” he said.