Government blinks on capital gains tax on real estate

Government offers relief on long-term capital gains tax for immovable property, allowing taxpayers to choose lower tax rate.

Facing a backlash over changes to the long-term capital gains tax regime announced in the Budget, including critiques from MPs within the NDA coalition, the government has relented to grant some relief for property transactions.

Finance Minister Nirmala Sitharaman had announced that the tax on long-term capital gains is being reduced from 20% with indexation benefits, to 12.5% without indexation benefits. An amendment is being made to The Finance Bill, 2024, as per details circulated amongst Lok Sabha members, to enable taxpayers to choose either of these two tax rates that work out lower for them, in cases involving transfer of immovable assets like land and building acquired before July 23 this year.

This marks a sharp reversal from the government’s firm stance on the issue after the changes in the Budget had evoked sharp critiques about the deleterious impact of the loss of indexation benefits on middle class homeowners, and the real estate sector at a broader level. Officials had argued that the new tax rate structure, with a lower tax rate minus the indexation benefits, will benefit people in almost all cases.

Industry bodies had sought a rethink on the proposal, observing that the removal of indexation benefits amounted to a retrospective tax change for those who had bought properties earlier. They had pointed out that this would especially hurt those who had made investments in assets that had delivered lesser appreciation in value over the years.

Several members of Parliament have also been urging the government to reconsider the proposal. On Tuesday, during the debate on the Finance Bill in the Lok Sabha, TDP MP Lavu Sri Krishna Devarayalu echoed other MPs’ view and said there was a lot of talk on this issue outside the House.

Noting that this concerned taxpayers’ hard-earned money, Mr. Devarayalu said the middle class people were affected. “So, I think, there should be a relook at this indexation because the middle class people think that real estate is one thing that they can safely invest in. We feel that it should be protected. I hope that the Finance Minister will listen to this,” he said.

The Finance Minister is expected to elucidate the changes when she responds to the debate on the Finance Bill in the Lok Sabha on Wednesday. Tax experts said giving taxpayers an option between the two tax regimes would quell some of their concerns around losing indexation benefits as a trade-off for lower long term capital gains tax rate.