Indexation or Lower LTCG Rate: Now, You Get to Choose!

By Lodha

The government has amended its contentious proposal to do away with indexation benefit on real estate sales and has now offered a choice to homebuyers: either opt for the indexation benefit if it offers a lower tax outgo, or choose the newer tax rule if it gets you a better deal.

As per the latest development, the benefit would be given to all homes bought before July 23, 2024, the day the decision was announced in the Union Budget. Only properties brought after July 23, 2024 will not be eligible to get the benefit.

The announcement is a welcome step that has been cheered by homeowners and real estate developers in India. Here’s everything you need to know about the indexation benefit, and what the new rule means for you.

What is Indexation Benefit?

When you sell a property held for at least two years, any profit earned on the sale is called “long term capital gains”, or LTCG. The government expects you to pay LTCG tax on property.

Before Budget 2024, the tax rule said you need to pay 20% LTCG but could avail the indexation benefit.

The indexation benefit on real estate allows a seller of a home to adjust their purchase price to inflation, reducing their tax liability.

Here’s how it works:

• Say you bought a home in one of Lodha’s premium developments for Rs 1 crore ten years ago. If the price of the property has increased to Rs 2 crore, and you sold the home today, you would incur a profit, or capital gain, of Rs 1 crore.
• Per the old tax rule, you would have ordinarily been liable to pay LTCG tax on of 20% on the profit of Rs 1 crore, i.e. Rs 20 lakh. But you were also given the indexation benefit. So, your purchase price will be adjusted against the prevailing inflation rate. Thus, the purchase price could be considered Rs 1.5 crore, and your profit will consequently fall to Rs 50 lakh, meaning you will have to pay LTCG tax of Rs 10 lakh (20% of your notional profit) instead of Rs 20 lakh (20% of your actual profit of Rs 1 crore).
• The government publishes a “cost inflation index”, which prescribes the inflation rate that is used to revise the purchase cost higher.

What Did the Govt First Propose?

In her recent Budget speech, Finance Minister Nirmala Sitharaman said the taxation structure was being simplified, and now the seller of a home will no longer have the indexation benefit.

To offset the hit, she proposed that the government would reduce the rate of LTCG tax on property from 20% to 12.5%.

The announcement saw sharp reactions from homeowners. While analysts ran through the changes and came up with the following conclusions: the lower rate would benefit homeowners if a property was held for short periods, or if the inflation rate was low, or if there were large capital gains. In the opposite circumstances, the indexation rule would have been beneficial.

What Has Changed Now?

While tabling the Finance Bill, the government has introduced a “grandfathering” clause. This means that the indexation benefit will still apply to any home that was purchased before July 23, 2024, and that the seller will be able to reduce their tax outgo using the indexation rule if it provides a benefit.

The modification of the rule offers a dual benefit now: now, homebuyers will be able to avail of whichever regime offers them lower tax liability.

However, for homes purchased after July 23, the new rule of the lower 12.5% LTCG rate along with no indexation benefit will apply at the time of sale.

What This Means

In many cases, the lower rate of LTCG on property will be beneficial while calculating tax, making the indexation benefit redundant. However, by bringing back the indexation benefit on real estate bought before July 23, the government has achieved three outcomes:

• It provides owners of existing homes the option to reduce their tax liability using the indexation benefit.
• It achieves the government’s goal of simplifying the tax structure by eliminating the need to do multiple calculations.
• It has ensured that critical decisions such as tax changes are taken with prospective effect and not retrospective effect, and that they apply to only transactions that take place after the rule is announced.

The amended rule also removes the fog of uncertainty surrounding taxation rules for real estate, which will allow you to invest in premium developments by top builders in India, like Lodha.