End of indexation benefit on property sale has ignited a debate

End of indexation benefit on property sale has ignited a debate

Subject: Eco

Sec: Inflation

Context:

The Budget proposed to remove the indexation benefit available for calculation of any long-term capital gains available for property, gold and other unlisted assets.

More about News:

• Several quarters against the capital gains tax regime announced in Budget 2024-25.
• Nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation.
• Proposed to remove the indexation benefit available for calculation of any long-term capital gains available for property, gold and other unlisted assets.
• It also proposed to rationalise capital gains tax on these assets at 12.5 per cent as against 20 per cent earlier that came with indexation benefit.
• Tax incidence for the new rate without indexation may be lower for properties held for shorter durations.

Indexation benefit:

• Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. The government has clarified that the indexation benefit for properties bought after 2001 will be removed while retaining it for properties bought before 2001.

Capital gain:

• Capital gain is denoted as the net profit that an investor makes after selling a capital asset exceeding the price of purchase.

Major changes brought about in the taxation of capital gains by the Finance Bill, 2024:

• The taxation of capital gains has been rationalised and simplified. There are 5 broad parameters to this rationalisation and simplification, namely:-

1. Holding period has been simplified. There are only two holding periods now, viz. 1 year and 2 years.
2. Rates have been rationalised and made uniform for majority of assets.

• Indexation has been done away with for ease of computation with simultaneous reduction of rate from 20% to 12.5%.

1. Parity between Resident and Non-resident.
2. No change in roll over benefits.

Overall rationale for changes:

• Simplification of any tax structure has benefits of ease of compliance viz computation, filing, maintenance of records. This also removes the differential rates for various classes of assets.