Govt. offers relief on long-term capital gains for real estate, allows investors to choose between old and new LTCG regime

In a massive relief to those holding legacy, long-time investments in real estate, the government today moved an amendment, offering them a choice between the old and new methods of calculating long-term capital gains (LTCG) and paying whichever is the lower of the two as tax.

Amidst representations from the real estate sector, and concerns that removing indexation benefits would lead to a surge in black money inflows in the segment, the government proposed the aforementioned changes. Last month, while presenting the Union Budget 2024 on July 23rd, 2024, finance minister Nirmala Sitharaman had announced doing away with indexation benefit for all asset classes like real estate, gold and more. To soothe the blow, the FM had also lowered the LTCG from its previous rate of 20% to 12.5%.

What was the condition before?

Prior to Union Budget 2024, real estate investments would qualify for LTCG tax, provided they were held for more than 2 years, or 24 months. The LTCG tax payable would be 20%, along with indexation benefit. As the government noted in the finance bill, "indexation available under the second proviso to section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold, and other unlisted assets. This will ease the computation of capital gains for the taxpayer and the tax administration".

Indexation allowed investors to factor in the impact of inflation on their investment over the years, thereby increasing the cost of acquisition, which reduced their capital gains and thus, lowered their overall LTCG tax liability. Here, the government considered the indexed cost of acquisition, rather than the original cost of acquisition, for calculating LTCG.

Consider this: Manya purchased a property in FY 2002-03 for Rs 30,00,000. In June 2024 (FY24-25), she decided to sell it for Rs 80,00,000.

Now, under the new LTCG regime (12.5% sans indexation benefit), her tax liability would come down to Rs 6,25,000 (12.5% of 50,00,000).

But if she opted for indexation benefits, her indexed cost of acquisition would be calculated using this formula:
Cost Inflation Index (CII)value for transfer/sale year/CII for purchase year, or 2001-02 (whichever is later) X cost of acquisition] = 363/105 X 30,00,000= Rs 1,03,71,428 (around Rs 1 crore)

(CII values are issued by the government)

This is the cost Manya would have to pay, if she were to buy the same property today. But since she sold her house for Rs 80,00,000, she incurred a capital loss of around Rs 20,00,000 and hence, would not have to pay any LTCG tax.

Another change that budget announced was that all properties that were purchased prior to 2001 would be grandfathered. This meant that indexation benefits would be applicable to properties which had been purchased prior to 2001.

What changes now?

There are two major changes:

1. Going ahead, investors will have the choice to avail either of the two LTCG regimes-either pay tax on a lower rate of 12.5% (minus indexation), or pay LTCG at the rate of 20%, along with indexation benefit. They will have the freedom to pay taxes per whichever regime which reduces their tax liability.

2. The grandfathering clause, which was earlier set at 2001, will now be considered at 23rd July, 2024. This means that for any property (land or building) that was transferred or sold before July 23rd, 2024, taxpayers will have the option to choose between either of the LTCG regimes, and pay the lower of the two as tax.

However, any property that has been sold after July 23rd, 2024 will continue to be taxable exclusively under the new LTCG regime i.e. taxable at 12.5% minus the benefit of indexation. The time period proposed in the budget for an asset to qualify as a long-term capital asset i.e. 36 months would also continue to apply.

This benefit will only be applicable to real estate i.e. immovable property. Transfer/sale of other assets such as gold will continue to attract 12.5% LTCG sans indexation benefits.