LTCG revamp leaves homeowners with higher burdens, fewer reliefs

From surcharge burdens to dead losses, the new 12.5% non-indexed tax regime now reshapes property taxation

- Shipra Singh

Effective 23 July 2024, the government overhauled the taxation of long-term capital gains on house properties. A new tax rate of 12.5% but without indexation was introduced for properties sold on or after this date. Indexation allows homeowners to adjust purchase price for inflation, thereby lowering net capital gains. To cushion the impact, a grandfathering rule was introduced—for properties bought before the cut-off date, owners can still choose the earlier indexation method and pay 20% tax, if that results in lower capital gains.

While the grandfathering option may appear favourable, it comes with significant caveats. The relief applies only to tax calculation on the gains, not to the broader computation of gross total income. This means the full non-indexed gain is still added to total income, potentially pushing taxpayers into higher surcharge brackets. It also prevents the recognition of genuine long-term capital losses and restricts tax exemptions under Sections 54 and 54EC.

Ashish Karundia, founder of chartered accountancy Ashish Karundia & Co, points out that the grandfathering concession is narrow, as it reduces the tax rate but does not change the way capital gains interact with other provisions in the tax laws. "For homeowners, the long-term implications could be more significant than the immediate tax savings," he said.

Why is it inflating net income? While filing Income Tax Returns (ITR) this year, taxpayers who sold house property after 23 July 2024 noticed a pattern. The ITR utility calculates tax on property gains using the more favourable of the indexed or unindexed purchase price, but at the same time, it adds the entire unindexed gain to the gross total income.