Finance Minister Nirmala Sitharaman in the Lok Sabha on August 6, 2024.
| Photo Credit: PTI

Facing a backlash over changes to the long-term capital gains tax regime announced in the Budget, including critiques from MPs within the NDA coalition, the government has relented to grant some relief for property transactions.

Finance Minister Nirmala Sitharaman had announced that the tax on long-term capital gains is being reduced from 20% with indexation benefits, to 12.5% without indexation benefits. An amendment is being made to The Finance Bill, 2024, as per details circulated amongst Lok Sabha members, to enable taxpayers to choose either of these two tax rates that work out lower for them, in cases involving transfer of immovable assets like land and building acquired before July 23 this year.

This marks a significant reversal from the government’s firm stance on the issue after the changes in the Budget had evoked sharp critiques about the deleterious impact of the loss of indexation benefits on middle class homeowners, and the real estate sector at a broader level. Officials had argued that the new tax rate structure, with a lower tax rate minus the indexation benefits, will benefit people in almost all cases.

Retrospective tax change

Industry bodies had sought a rethink on the proposal, observing that the removal of indexation benefits amounted to a retrospective tax change for those who had bought properties earlier. They had pointed out that this would especially hurt those who had made investments in assets that had delivered lesser appreciation in value over the years.

Several members of Parliament have also been urging the government to reconsider the proposal. On Tuesday, during the debate on the Finance Bill in the Lok Sabha, TDP MP Lavu Sri Krishna Devarayalu echoed other MPs’ view and said there was a lot of talk on this issue outside the House.

Noting that this concerned taxpayers’ hard-earned money, Mr. Devarayalu said the middle class people were affected. “So, I think, there should be a relook at this indexation because the middle class people think that real estate is one thing that they can safely invest in. We feel that it should be protected. I hope that the Finance Minister will listen to this,” he said.

The Finance Minister is expected to elucidate the changes when she responds to the debate on the Finance Bill in the Lok Sabha on Wednesday. Tax experts said giving taxpayers an option between the two tax regimes would quell some of their concerns around losing indexation benefits as a trade-off for lower long term capital gains tax rate.

“Through the amendments proposed to the new capital gain tax regime introduced in the Budget, the Centre has tried to appease the taxpayers by addressing the concerns raised to some extent. While abolishment of indexation benefit continues, properties acquired prior to July 23, 2024, are proposed to be grandfathered with taxpayers getting an option to offer the capital gain tax under the tax rate that is more beneficial for them,” said Yogesh Kale, executive director, Nangia Andersen India.

Defending the Budget proposals a day after it was presented, officials had sought to emphasise that nominal real estate returns are generally in the range of 12%-16% per year, much higher than inflation, so substantial tax savings are expected for a vast majority of such taxpayers. “Only cases where the returns are below 9%-11% a year, may find it problematic. But such low returns are rare in real estate,” a senior official had said.

Union Finance Minister Nirmala Sitharaman with her deputy Pankaj Chaudhary at the Parliament as she arrives to present the Union Budget 2024-25, in New Delhi on July 23, 2024.
| Photo Credit: ANI

The government has garnered ₹98,681 crore from long term capital gains tax on listed equities in 2022-23, a 15% growth over the previous year, Parliament was informed on Tuesday.

Minister of State for Finance Pankaj Chaudhary gave details of collections from Long Term Capital Gains (LTCG) tax between fiscal 2018-19 and 2022-23 in the Rajya Sabha.

The long term capital gains on equities and units of equity oriented mutual funds were brought in from April 2018. Such gains were taxed at 10%, with gains of up to ₹1 lakh annually being exempted.

As per the details shared with the Parliament, ₹98,681.34 crore was collected from LTCG in 2022-23, up 15% over ₹86,075.49 crore collected in 2021-22 fiscal.

The collection was about ₹38,589 crore in 2020-21, ₹26,008 crore in 2019-20 and ₹29,220 crore in 2018-19.

To a question on whether the government is contemplating to abolish the LTCG tax on equities/mutual funds during 2024-25, Mr. Chaudhary said, “There is no such proposal”.

The Budget for 2024-25, announced on July 23, hiked LTCG tax on equities and equity oriented mutual funds to 12.5%, from 10%. The exemption threshold was also hiked to ₹1.25 lakh, from ₹1 lakh previously.

The holding period for equities for the purpose of calculating long term capital gains is more than 12 months.