LTCG Tax Rollback: Major relief for middle-class homeowners, property prices may be impacted

Experts add that the option to select indexation or opt for the old scheme offers significant relief for long-term capital gains on immovable property.

In a major relief for property owners, the central government has proposed an amendment to the long-term capital gains (LTCG) taxes for properties bought before July 23, 2024, allowing the homeowners to choose between paying a 20 percent LTCG tax with an indexation benefit or a 12.5 percent rate without indexation.

This comes after a major backlash from the real estate sector, including middle-class homeowners, over the higher tax liability without indexation benefits to factor into market inflation. Removing indexation benefits also raised fears that transactions would include more cash, fuelling black money back into the real estate market.

The changes

According to the new amendments, homeowners who bought properties before July 23, 2024, will have the option to choose between the new regime taxed at 12.5 percent without indexation benefits or the old regime taxed at 20 percent with indexation benefits. However, owners who bought the property on July 23 or after will have to follow the new tax regime by default.

This change was introduced in the Finance Bill tabled in the Lok Sabha on August 6.

Indexation adjusts the purchase price of an asset for inflation, thereby reducing the gains and, ultimately, the tax liability.

Welcoming the amendment, real estate experts and homebuyers said the flexibility to choose between the old and new regime will allow sellers to choose the most advantageous option, minimising their tax liability.

Flexible option for middle-class homeowners

Under the new tax regime according to Union Budget 2024, of the 20 scenarios analysed, Moneycontrol found taxpayers will face an additional tax burden under the new regime in 14 scenarios, while in six scenarios, homeowners will benefit under the new rules.

Ritesh Mehta, Senior Director, and Head (North and West) - Residential Services and Developer Initiative, JLL said that the amendment will especially give relief to middle-class homeowners who are quite sensitive about any tax policy changes and changes in financial structure.

Experts add that the option to select indexation or opt for the old scheme offers significant relief for long-term capital gains on immovable property.

"For instance, if someone has an ancestral property from the 1980s and plans to sell it in 2024, opting for the 20 percent long-term capital gains tax with indexation might be more beneficial. Conversely, someone who purchased a property just two years ago may find the 12.5 per cent rate more advantageous. This flexibility allows investors and property owners to better manage their real estate investments and maximise their returns," Chintan Sheth, Chairman & Managing Director of Sheth Realty said.

Property prices may be impacted if the sector slows down

Experts say if a property's value has significantly outpaced inflation, the 12.5 percent rate might be more beneficial. "However, indexation could be advantageous in cases where property appreciation is closer to the inflation rate. This amendment is expected to stimulate investment and sales in the housing market by potentially reducing the tax burden on sellers," Shishir Baijal, Chairman and Managing Director of Knight Frank India told Moneycontrol.

Further, properties purchased after July 23, 2024, will continue to be taxed under the new law at 12.5 percent on LTCG without indexation benefits. "I believe 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 real estate market slows down due to tax implications," Dhruv Chopra, Managing Partner, Dewan P. N. Chopra & Co. added.

Additionally, while this benefit won't apply to future transactions, it gives taxpayers more time to plan the sale of their assets to maximise benefits.