Budget'24: New LTCG rule to hit long-term property owners hard
The government has argued that despite the removal of indexation, the overall tax burden on property sales would decrease due to the lowered LTCG tax rate. However, experts have expressed concerns that without indexation benefits, taxpayers may face higher tax liabilities, especially on properties held for extended periods.
New Delhi: The recent adjustments in capital gains tax rates for real estate transactions have sparked concern and debate among property owners. Particularly those planning to sell inherited properties. In the Budget 2024 announcement, the long-term capital gains (LTCG) tax on property sales has been reduced from 20% to 12.5%. However, alongside this reduction, the government has eliminated the benefit of indexation, a move that has raised eyebrows among taxpayers.
Understanding indexation and its impact
Indexation refers to adjusting the purchase price of a property for inflation. This is crucial in calculating the actual profit gained from its sale. Without indexation, the capital gains on properties sold are not adjusted for inflation. Potentially resulting in higher taxable gains for property sellers.
Government’s Perspective vs. Expert Analysis
The government has said that despite the removal of indexation, the overall tax burden on property sales would decrease due to the lowered LTCG tax rate. However, experts have expressed concerns that without indexation benefits, taxpayers may face higher tax liabilities. Especially on properties held for extended periods.
Comparing Returns and Inflation
The Income Tax Department has highlighted that property investments typically yield annual returns ranging from 12% to 16%. Whereas inflation rates remain comparatively lower, around 4% to 5%. This disparity implies that property investments often outperform inflation, thus justifying higher tax implications under the new tax regime.
To illustrate the impact of these changes, consider the case of an individual who purchased a property several years ago and is now selling it. Under the previous regime, indexation would have reduced the taxable capital gains, resulting in a lower tax liability. However, under the new rules, the absence of indexation could lead to a higher taxable amount and consequently, a higher tax bill.
Implications for Different Categories of Property Owners
Property owners who acquired or inherited properties before a certain cutoff date continue to benefit from indexation under the grandfathered provisions. This ensures that they are not adversely affected by the recent changes in tax regulations.
Expert Opinions and Public Perception
Financial experts have cautioned that the reduction in LTCG tax rates might appear favorable on the surface. But the removal of indexation could offset these benefits for long-term property holders. They emphasize that those who purchased properties more recently might benefit from the reduced tax rates. Whereas older property holders may face increased tax liabilities.
The changes in capital gains tax rates for property sales signify a significant shift in how taxation is applicable on such transactions in India. On one hand, the government aims to simplify tax structures and encourage property transactions. On the other hand, impact on individual taxpayers varies depending on the duration of property ownership and the applicability of indexation benefits. As these changes take effect, property owners are should consult with tax experts to understand their specific tax implications. They should make informed decisions regarding property sales.
In conclusion, the intention behind reduction in LTCG tax rates is to stimulate the real estate sector. Although, the removal of indexation has brought in complexities that necessitate careful consideration by property owners and investors alike.