Relief for homeowners likely as finance ministry may modify LTCG regime

One of the most hotly debated proposals of this year’s Budget may see a tweak, with the finance ministry likely to provide relief to homeowners by finetuning the new long-term capital gains (LTCG) provisions announced on July 23 that seek to remove indexation benefits for unlisted assets, including property and gold.

The changes being considered include extending the effective date of the new regime to the next financial year, instead of the day the Budget was tabled in Parliament. Besides, discussions are going on about grandfathering the purchase of all asset classes, including property, where the indexation provision could apply.

“Some modalities are being worked out in some form in the proposed regime with the intent to provide relief to homeowners,” an official privy to the discussions told Business Standard. However, any significant change (tweaks in the rate structure) has been ruled out.

He said there had been deliberations on the issue after the real estate sector gave some data points, claiming that it (the new tax structure) could be detrimental to home owners as well as for the sector.

“The new changes in the works will be accommodated in the Finance Bill,” the source added, ahead of its passage in both Houses of Parliament.

An email sent to the finance ministry remained unanswered till the time of going to press.

The Budget has proposed an overhaul in the capital gains tax regime, including lowering the LTCG tax to 12.5 per cent from 20 per cent. It has also suggested doing away with the indexation benefit for homes bought on or after April 1, 2001.

The proposal has sparked concern because indexation allows the home owners to take inflation into account in calculating capital gains while selling properties.  With the new rule, the home owner may have to pay huge taxes, particularly on old properties where the selling price is not high.

“Merely providing for a cutoff date — 2001 — may not help in many cases of real estate purchased more than 10 years ago where appreciation in market value is just about the indexed cost of acquisition or falls short of it,” said Sudhir Kapadia, senior advisor, EY.  

According to him, a better option is to provide for grandfathering of all assets purchased before the date of the Budget so that the earlier indexation provisions (with a higher rate of 20 per cent) would apply, he said, and only for assets purchased after July 23 would the new provision of 12.5 per cent tax (without indexation) be applicable.

The industry says a review of the new rule could be done in line with what was done with effect from January 1, 2018, when long-term capital gains tax on equities was reintroduced after many years.

The new regime, however, retained rollover benefits. This allows the taxpayer to reinvest the proceeds from the sale of an asset in another in a specific time period without paying LTCG tax.

However, experts say a home owner who wished to monetise old properties and not look for a fresh purchase would not benefit and end up paying more tax.

A day after the Budget announcement, the income-tax department on July 24 put out detailed clarification on the regime.

In an explanation post on X (formally Twitter), the department said an issue had been raised as to what would be the cost of acquisition as on April 1, 2001, for properties purchased prior to 2001.

For properties (land or building or both) purchased prior to April 1, 2001, the cost of acquisition as on April 1, 2001, shall be the cost of acquisition of the asset to the assessee, or the fair market value (not exceeding the stamp duty value, wherever available) of such an asset as on April 1, 2001.

ON THE CARDS 
 

> FinMin reviews new LTCG regime after 12.5% tax without indexation sparks concerns over property transactions 

> Discussion underway to extend the date of implementation to FY26

> Grandfathering could be provided for ancestral properties