Homeowners Rejoice: Government Reinstates Indexation Benefit for Property Sales
Introduction
The government is set to introduce flexibility in computing capital gains tax on immovable property by amending the Finance Bill 2024, presented last month. This move is expected to bring relief to taxpayers and the real estate industry.
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Proposed Amendments to Finance Bill 2024
Finance Minister Nirmala Sitharaman is anticipated to propose amendments to the Bill on Wednesday in Parliament. The amendments will allow individuals selling assets bought before 23 July 2024 to compute their capital gains tax obligation under either the earlier or the new tax schemes, whichever is more beneficial. This effectively restores the indexation benefit previously available on the sale of property.
Tax Computation Flexibility
The proposed amendment will enable taxpayers to choose between computing their capital gains tax at 12.5% without indexation (the new scheme) or at 20% with indexation (the old scheme). The taxpayer can then pay the lower of the two amounts. This rollback is expected to provide significant tax relief to property sellers.
Understanding Indexation Benefit
Indexation benefit involves adjusting the purchase price of an asset for inflation while computing capital gains tax. This adjustment reduces the taxable gain, thereby lowering the tax burden on the seller. The indexed purchase price is calculated using a cost inflation index (CII).
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Industry Reactions
Niranjan Hiranandani, chairman of Hiranandani Group and NAREDCO, praised the move, calling it a significant step forward. "By enabling taxpayers to choose the lower tax burden between the new and old schemes, the amendment is poised to drive investment and enhance sales across housing segments," said Hiranandani.
Background and Budget Amendments
In the budget presented on 23 July, the government had proposed amending the capital gains tax structure. However, the removal of the indexation benefit led to calls from investors for its restoration, as the lower tax rate proposed without indexation might not benefit all sellers.
Government's Commitment to Simplification
Simplifying and rationalizing the tax regime remains a priority for the government. Finance Minister Sitharaman, who moved the finance bill for passage in the Lok Sabha on Tuesday, is expected to respond to the discussion on the bill on Wednesday. Some opposition members have sought tax relief for the middle class during the discussion.
The finance minister announced a comprehensive review of the Income Tax Act in her budget speech, expected to be completed in six months. This review aims to further simplify the tax regime and ensure a fairer tax system for all stakeholders.
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