Key Highlights of the Amendment

1. Choice of Tax Computation

Taxpayers can now opt for a 12.5% LTCG tax rate without indexation or a 20% LTCG tax rate with indexation for properties acquired before July 23, 2024. This choice is available exclusively to resident individuals and Hindu Undivided Families (HUFs).

2. Grandfathering Provision

The amendment includes a grandfathering provision, allowing the computation of LTCG tax using both the new scheme (12.5% without indexation) and the old scheme (20% with indexation). Taxpayers will pay the lower of the two computed taxes, providing significant relief.

3. Exclusion for Non-Residents and Other Entities

Non-resident individuals, companies, partnership firms, and Limited Liability Partnerships (LLPs) will not benefit from this grandfathering provision. These entities must follow the new tax rules without the option to choose.

4. Background and Rationale

In Budget 2024, Finance Minister Nirmala Sitharaman proposed eliminating indexation benefits for long-term capital gains on real estate. Indexation adjusts the purchase price of an investment to account for inflation, reducing the net profit and the associated tax liability. The removal of this benefit raised concerns about increased tax burdens and potential illicit financial activities in property transactions.

The real estate sector strongly opposed this proposal, warning that it could hinder the sector's growth. In response, the government introduced this amendment, offering taxpayers a choice between the 12.5% tax rate without indexation and the 20% tax rate with indexation for properties acquired before July 23, 2024. This move is seen as a compromise to balance revenue collection with the sector's growth needs.

Implications for Taxpayers

1. Lower Tax Liability

Taxpayers can compute their tax liability using both methods and choose the lower amount, potentially reducing their tax burden.

2. Flexibility in Tax Planning

The choice allows for more effective tax planning, enabling taxpayers to select the most beneficial option based on their individual financial situations.

3. Relief for Homeowners

The amendment provides relief to homeowners who feared a significant tax burden due to the removal of indexation benefits.

Conclusion

The proposed amendment to the Finance Bill, 2024, is a welcome relief for the real estate sector and taxpayers. By allowing a choice between the 12.5% LTCG tax rate without indexation and the 20% rate with indexation, the government has addressed concerns while maintaining revenue collection. This move underscores the government's commitment to balancing economic growth with fair taxation.

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