LTCG Tax Rollback: Big Relief for Homeowners, Possible Impact on Property Prices

In a significant relief for property owners, the central government has proposed an amendment to the long-term capital gains (LTCG) taxes for properties purchased before July 23, 2024. Homeowners can now choose to pay a 20% LTCG tax with indexation benefits or a 12.5% rate without indexation.

This proposal follows substantial backlash from the real estate sector, particularly from middle-class homeowners, who are concerned about higher tax liabilities without indexation to account for market inflation. The removal of indexation benefits had also raised concerns about increased cash transactions, potentially fueling black money in the real estate market.

Key Changes:

The amendments specify that homeowners who bought properties before July 23, 2024, can select between the old regime with a 20% tax and indexation benefits or the new regime with a 12.5% tax without indexation. However, properties purchased on or after July 23 will automatically fall under the new tax regime.

This change was introduced in the Finance Bill tabled in the Lok Sabha on August 6.

Indexation adjusts an asset's purchase price for inflation, thus reducing the capital gains and, consequently, the tax liability. Real estate experts and homebuyers have welcomed the amendment, stating that the flexibility to choose between the old and new regimes allows sellers to minimize their tax liabilities effectively.

Impact on Middle-Class Homeowners:

According to the Union Budget 2024, Moneycontrol's analysis of 20 scenarios found that in 14 scenarios, taxpayers face a higher tax burden under the new regime, while in six scenarios, homeowners benefit from the new rules.

Ritesh Mehta, Senior Director and Head (North and West) - Residential Services and Developer Initiative at JLL, noted that the amendment would particularly benefit middle-class homeowners who are sensitive to tax policy changes and financial restructuring.

Experts highlight that the option to choose between indexation and the old scheme provides significant relief for long-term capital gains on immovable property.

"For example, someone with an ancestral property from the 1980s planning to sell in 2024 might find the 20% LTCG tax with indexation more beneficial. On the other hand, someone who bought a property just two years ago may prefer the 12.5% rate. This flexibility enables investors and property owners to better manage their real estate investments and maximize returns," said Chintan Sheth, Chairman & Managing Director of Sheth Realty.

Potential Impact on Property Prices:

If a property's value has significantly outpaced inflation, the 12.5% rate might be more beneficial. "However, indexation could be advantageous when property appreciation is closer to the inflation rate. This amendment is expected to stimulate investment and sales in the housing market by potentially reducing the tax burden on sellers," explained Shishir Baijal, Chairman and Managing Director of Knight Frank India.

Properties purchased after July 23, 2024, will continue to be taxed at 12.5% on LTCG without indexation benefits. Dhruv Chopra, Managing Partner at Dewan P. N. Chopra & Co., believes that investors will still invest in immovable properties for long-term wealth creation despite the tax amendments. However, there might be slight changes in property prices to attract investors if the real estate market slows due to tax implications.

Moreover, while this benefit won't apply to future transactions, it gives taxpayers more time to plan their asset sales to maximize benefits.