Nirmala Sitharaman’s seventh consecutive budget presented yesterday in the Lok Sabha has elicited strong responses based on side of the political prism one is looking from. One of the most talked-about proposals is the removal of the indexation benefit from the calculation of gains on long-term property sales. It has seen some of the ardent BJP supporters raise their voices of discontent.
While big real estate sector players argue that the move to reduce the tax rate from 20% to 12.5% in the long-term capital gains (LTCG) on the sale of the property will draw investors back into real estate, those who have invested in the property in retail, will bear the brunt as they will not have the benefit of indexation to adjust against inflation.
Indexation is a method for adjusting the purchase price of an asset against inflation, to calculate the capital gain in real terms, and arrive at a logical amount of gain to be taxed when the asset is sold.
The real estate sector feels that as a lesser gain would dissuade old property holders from selling out, the requirement for the property would turn towards new homes.
There is no plan to reset the values of older properties at a particular point in time, which would mean that the cost of the property purchased would be deducted from the selling price and a 12.5% tax would be levied on the difference.
Old ancestral properties will be hit the hardest, as the sellers in most cases would not need to buy another property to avail exemption of capital gains tax. If you buy another property in two years of time from the proceeds of your sold property, you are exempt from capital gains tax. You need to keep the proceeds in a savings bank or as a fixed deposit account in a bank for the specified period.
However, as the benefit of indexation is gone, some believe that the transactions would involve more black money now to reduce tax liability.
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