Real Estate Indexation Rule Revised—What This Means For Property Owners | NDTV Profit Explains

The government revised its indexation rules introduced in Budget 2024 on Tuesday, allowing taxpayers to choose between a 12.5% long-term capital gains tax rate without indexation or a 20% rate with indexation.

The proposed changes will allow real estate investors to seek relief under the long-term capital gains tax for investment in real estate bought up to July 23, instead of the 2001 cutoff which was given in the budget proposal.

Here is a look at what the rule was and how the reversal will affect homeowners.

In the 2024 Budget, the government had announced a reduction in the long term capital gains tax rate on real estate from 20% to 12.5%. However, the indexation benefit, which adjusts the cost of acquisition for inflation, was removed. The changes were made with the intention to simplify the capital gains tax structure and was proposed to be applicable to all taxpayers.

Removal of the indexation benefit had sparked criticism. In simple terms, indexation helps adjust the purchase cost of a property for inflation, effectively increasing the cost of the asset and reducing the taxable capital gains. Without this benefit, the tax payable on capital gains could be significantly higher, especially for real estate assets with lower appreciation. 

A lower appreciation, in certain situations, would mean that taxable gains would be larger if indexation benefit was not provided. This, in turn, was leading to concerns among property owners and investors.

In response to the backlash, the government revised the proposal. The changes now allow resident individuals and Hindu Undivided Family to choose the method of calculating LTCG tax on real estate. The option is applicable only where the property has been purchased before July 23, 2024. Taxpayers can opt for either of the below options, based on what is more beneficial to them:

• A tax rate of 12.5% without the indexation benefit, or

• A tax rate of 20% with the indexation benefit.

This change enables select taxpayers a choice to opt for the provision that minimises their tax liability.

With the reversal of the indexation scrap, sellers of properties purchased on or after July 23, 2024, will have no option but to opt for the 12.5% tax rate and no indexation benefit will be available to them.

The revision offers relief to resident individuals and HUF taxpayers by providing them with a choice in calculating LTCG tax on their real estate purchased prior to July 23, 2024. Property owners can opt for the provision which is more beneficial to them. This flexibility aims to ensure that taxpayers are not unfairly burdened by higher taxes due to the removal of the indexation benefit.