Deciding to sell property? Pick between 12.5% or 20% tax rate with new rules

New tax choices for homeowners: The recent overhaul of the capital gains tax regime for real estate introduces a new level of flexibility for homeowners. Under the revised rules, property sellers can now choose between two tax rates: a 20 per cent rate with indexation benefits or a 12.5 per cent rate without indexation. This update aims to address concerns regarding the removal of indexation benefits and provide relief to property owners.

Tax calculation and impact

The Finance (No. 2) Bill, 2024, introduced in the Lok Sabha, stipulates that properties acquired before July 23, 2024, can benefit from either tax regime. Specifically:

• 12.5 per cent LTCG Rate without Indexation: This option allows taxpayers to pay a lower tax rate of 12.5 per cent on capital gains without adjusting for inflation.
• 20 per cent LTCG Rate with Indexation: This traditional option permits a 20 per cent tax rate but allows for inflation adjustments using the Cost Inflation Index (CII), potentially reducing taxable gains.

Points to note

• The new rules apply specifically to capital gains from property sales.
• Taxpayers cannot switch between regimes once the tax is computed; the chosen method will be determined based on the figures provided.
• The amendment aims to balance tax revenue with addressing concerns over the removal of indexation benefits.

Will indexed rate save more?

According to LC Mittal, Director of Motia Group, this policy shift is poised to benefit long-term property owners. For instance, a property bought in 2000 for Rs 50 lakh and sold in 2023 for Rs 2 crore would see a taxable gain of about Rs 70 lakh under the current regime, leading to a tax of Rs 14 lakh. With the new flat rate of 12.5 per cent, the tax would amount to Rs 18.75 lakh  on the full gain of Rs 1.5 crore. In this scenario, the indexed rate would be more advantageous.

Mittal highlighted that this flexibility allows sellers to choose the option that minimises their tax liability based on their holding period and property appreciation. The change is expected to stimulate the real estate market by increasing transaction volumes, as sellers can better anticipate their tax liabilities.

Tax changes will drive transactions

Anurag Goel, Director at Goel Ganga Developments, stressed that the new tax regime may indirectly benefit buyers through increased market liquidity. Sellers who previously avoided transactions due to high tax liabilities might now be more willing to list their properties, potentially boosting demand for ready-to-move-in homes. This change could spur growth in various housing segments, particularly affordable housing, and contribute positively to India's GDP.

Shishir Baijal, Chairman and Managing Director of Knight Frank India, stressed that the new tax options offer flexibility. Sellers should evaluate their specific circumstances to determine the most beneficial tax rate

"Ideally, if a property's value has significantly outpaced inflation, the 12.5 per cent rate might be more beneficial. However, indexation could be advantageous in cases where 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 seller," Baijal said.

Rishi Anand, MD & CEO at Aadhar Housing Finance Limited, views the change as a positive step for the real estate sector. The option to choose between tax rates provides a “grandfathering” benefit for transactions before the July 23 announcement, potentially boosting growth in the affordable housing sector.

Finding your best tax rate

Vivek Rathi, National Director-Research at Knight Frank India, believes that while the new 12.5 per cent rate without indexation may seem appealing, the choice between the two rates should be carefully considered based on property appreciation.

Anuj Puri, Chairman of ANAROCK Group, pointed out that the revised rules will impact both homeowners and potential buyers. Homeowners gain flexibility in managing tax liabilities, while buyers may benefit from increased market activity and clearer tax implications.

"This will have a very profound impact on both homeowners and aspiring homebuyers. Homeowners gain flexibility in managing tax liabilities when they sell their property. For properties held over a long period, where inflation has majorly raised the property's value, opting for the 20 per cent tax rate with indexation would be beneficial. Indexation adjusts the purchase price for inflation, potentially reducing the taxable gain and overall tax liability," Puri said.

"For properties held for shorter periods or in low-inflation periods, the 12.5 per cent rate sans indexation could be more beneficial and result in a lower tax burden. This revision can potentially stimulate the residential property market because it provides clarity and implies potential tax burden reduction,” he added.

G Hari Babu, National President of NAREDCO also echoed the similar sentiments.

"This move is likely to mitigate concerns around increased cash transactions and potential resurgence of black money in the sector. We appreciate the government’s responsiveness to industry feedback and its efforts to create a more investment-friendly environment, which is crucial for the sustained growth and development of the real estate sector,” Babu added.