LTCG amendment: Experts cheer decision to restore indexation benefit for property. Why this govt move matters

Land and building owners now have a reason to cheer. The government has proposed an amendment to the Finance Bill 2024 regarding long-term capital gains (LTCG) tax, thereby relieving property owners of the extra tax burden that would have arisen on account of the latest changes announced by Finance Minister Nirmala Sitharaman on July 23 in the Union Budget 2024.

In the list of amendments to the Finance Bill (No. 2) 2024, the government has proposed that indexation benefit will be restored for immovable property bought before July 23, 2024. As per the provisions, tax would be calculated at the rate of 12.5 per cent without indexation, but if it exceeds 20 per cent with indexation, it would be ignored.

This has been proposed only for resident individuals and Hindu Undivided Families (HUFs).

What was announced in Budget 2024

The Budget 2024 announced that land and properties sold after July 23, 2024, would draw a long-term capital gains tax of 12.5 per cent without indexation instead of 20 per cent with indexation that existed earlier. The provision took effect immediately, i.e., July 23, 2024. 

This change was condemned by a number of taxpayers and observers including Dr Saumya Aggarwal, an assistant professor at Shri Ram College of Commerce (SRCC) who shared her critical viewpoint in this interview.

This is proposed in the amendment

The amendment says that if the new tax rate, i.e., 12.5 per cent (minus indexation) leads to a higher tax liability than 20 per cent with indexation, then the extra tax will be ignored. The relief is offered only in cases where the property was bought before July 23, 2024.

The amendment has received a thumbs-up from the stakeholders across the board. And rightly so.

Experts call it a positive move

Experts unanimously call the amendment a positive move since it will ensure that the indexation benefits will apply when the taxpayer is set to suffer loss because of new legislation. Although the relief is offered only on properties purchased before July 23, it is seen as a positive step by the government.

“This amendment aims to benefit property owners by offering more flexibility in tax calculations, potentially reducing tax liability based on individual circumstances. Importantly, indexation benefits will not apply if a taxpayer incurs a loss. Additionally, if a taxpayer has a profit without indexation but a loss with indexation, their tax payable will be zero. However, taxpayers cannot claim a loss resulting from the indexation benefit. The changes do not fully restore indexation benefits, as immovable properties acquired on or after July 23, 2024, will not be eligible for indexation. This amendment is a positive step from the finance minister, addressing concerns about the removal of indexation benefits while maintaining tax parity across asset classes,” said Mitesh Jain, Partner, Economic Laws Practice.

Ravi Bishnoi, Partner at Saraf & Partners, said, “This is a welcome move by the government as the investors would have the option to choose the calculation method which is favourable as far as tax outgo is concerned. This is mainly beneficial for owners who have held a property for a long period and the value of the property has appreciated significantly.”

“This amendment will be a relief for taxpayers who were paying excess tax due to flat rate of 12.5 per cent with no indexation benefit,” said CA Pratibha Goyal, a Delhi-based chartered accountant.

Meanwhile, in another development, Association of Mutual Funds in India (AMFI) reiterated its request to the government to extend grandfathering of indexation benefit to debt mutual funds till July 2024 so that investors are not taxed retrospectively.