India restores inflation adjustment benefit on sale of property

India this week restored the inflation adjustment benefit in taxing gains from sale of property.

The government on Wednesday passed an amendment in the budget legislation allowing taxpayers who sold assets such as land or buildings before 23 July to choose between the new and old tax regimes.

The new LTCG tax rate is 12.5%, reduced from 20%, but without indexation benefit.

People can choose either the 12.5% long-term capital gains (LTCG) tax rate without indexation benefits, or the higher 20% rate with indexation for real estate property bought before 23 July 2024.

Indexation helps adjust asset purchase prices for inflation, thereby reducing taxable gains. The removal of the benefit, however, may increase the tax burden for sellers.

Taxpayers can compute and choose whichever option offers a lower tax liability, finance minister Nirmala Sitharaman said in her reply to the discussion on the Finance Bill in the House.

“Not only are we coming up with an option, but also are saying–calculate the tax under both the options and tell us whichever is the lower and pay that,” she said.

Real estate stocks had surged on Wednesday, with the BSE realty index rising by 1.8%, ahead of the government’s amendments. On Thursday, the index was little changed from the day before’s closing at 12.30pm.

Sitharaman had said in the budget last month that the proposal to reduce the tax rate and remove the indexation benefit would lead to an overall reduction in average taxation, though analysts had said that the change would lead to a higher effective tax burden for property owners, especially those who have held their properties for over five years.

Sitharaman had also said that the logic for proposing the changes to the capital gains tax regime was to have more uniformity in the treatment of asset classes for ease of computing.