Relief For Home Owners: Govt Restores Indexation Benefits| Finance Bill| Capital Gains Tax

One of the hot debates following the first Budget under the Modi 3.0 government was the withdrawal of indexation benefits and its implications for homeowners. Even though the government provided several justifications for the same, an outpouring of concerns and outrage from certain sections continued.
And in the latest development, there is a rollback of the withdrawal of the indexation benefit on property sales. This is one of the amendments moved by the government in the Finance Bill 2024, which was presented last month. Overall, the Centre is proposing as many as 45 amendments to the finance bill.
Now, let's put the whole debate and all recent developments in context. Before the budget presentation this year, homeowners had the benefit of indexation on the sale of property. But, they also paid 20% as the long-term capital gains tax.
For context, indexation is the process of adjusting the original purchase price of an asset. The process allows a taxpayer to neutralise the impact of inflation while they are paying tax on capital gains. The indexed purchase price is calculated using a cost inflation index or CII.
Now, what changes were announced during this budget presentation this year? Well, the Finance Minister had announced the removal of the indexation benefit for properties bought up to 2001. Additionally, the long-term capital gains tax was reduced from the earlier 20% to 12.5%. This move definitely caught the attention of real estate investors, and property owners and became a subject of debate.
Many experts voiced concerns that removing the indexation benefit will substantially increase the overall tax burden for homeowners, even though the tax rate itself has been cut to 12.5%.
In a post-budget interview, FM Nirmala Sitharaman doubled down on her announcement, stating that most people will be better off under the new capital gains tax structure, despite the removal of the indexation benefit. She assured that the government decided on this new structure after an elaborate exercise.
But the debate continued. And as per the recent development, the government has decided to offer taxpayers two choices.
Choice #1: Taxpayers can pay 20% LTCG tax with indexation benefit on the sale of property acquired before the budget presentation date, July 23, 2024.
Choice #2: Pay the tax on LTCG at a reduced rate of 12.5% without indexation.
But the amendment makes one thing clear. For property purchases after the cut-off date of July 23, 2024, only the new regime with LTCG tax at a 12.5% rate without indexation will be applicable.
With these amendments, effectively all properties purchased before July 23rd have been grandfathered. Now, grandfathering is a provision that allows certain existing conditions/benefits to continue. It allows for an old rule or law to apply up to a certain date, while the new rule or law applies to all situations after that date.
Overall, the amendment is set to bring some relief and introduce flexibility in computing capital gains tax on property sales.
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