India

After facing massive criticism, GoI brings back indexation benefit on sale of property purchased before budget

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Prime Minister of India Narendra Modi with country's finance minister Nirmala Sitharaman. [File Photo]

In response to backlash over the Budget proposal to remove indexation benefits on long-term capital gains (LTCG), the government of India has announced that taxpayers can choose to pay 20% LTCG tax with indexation benefit on properties acquired before July 23, 2024, Indian Express reported.

Alternatively, taxpayers can opt for the previously introduced lower tax rate of 12.5% without indexation, as detailed in the amended Finance Bill. Taxpayers can choose the option that results in the lower tax payment.

These amendments represent a significant reversal of the Budget’s initial LTCG-related proposals for the real estate sector. Although the government initially defended the removal of indexation by highlighting the lower 12.5% tax rate, the decision faced considerable opposition from real estate investors and property owners who called for relief.

The amendment clarifies that for properties purchased after July 23, 2024, only the new LTCG tax regime of 12.5% without indexation will apply.

Indexation adjusts the original purchase price of an asset to account for inflation, allowing taxpayers to mitigate the impact of inflation on capital gains taxes. Without indexation, gains on long-held assets can appear inflated and unrealistic.

With the new amendments, properties purchased before the Budget presentation date of July 23 are effectively grandfathered. Previously, the proposal did not offer grandfathering for properties bought after April 1, 2001, with the fair market value on that date taken as the acquisition cost. Grandfathering allows old rules to apply to existing situations up to a certain date, with new rules applying thereafter.

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