NEW DELHI: In response to widespread criticism over the proposed removal of indexation benefits on long-term capital gains (LTCG) in the Budget, the government announced on Tuesday that taxpayers will have the option to pay a 20% LTCG tax with indexation benefits on property sales, provided the property was acquired before July 23, 2024.

Alternatively, taxpayers can opt for a lower LTCG tax rate of 12.5% without indexation benefits, according to amendments made to the Finance Bill. Taxpayers are allowed to choose the option that results in a lower tax liability. These changes mark a significant reversal from the Budget's original LTCG proposals for the real estate sector.

The government had initially defended the new LTCG tax regime, suggesting that the reduced 12.5% tax rate without indexation would benefit most transactions. However, the proposals faced backlash, with real estate investors and property owners calling for relief.

The amendment clarifies that for properties purchased after the cutoff date of July 23, 2024, only the new regime, which imposes a 12.5% LTCG tax without indexation, will apply. Indexation adjusts the original purchase price of an asset to account for inflation, helping taxpayers reduce their taxable capital gains. Without indexation, especially for assets held over a long period, the calculated gains may appear significantly higher than their actual value.

With these amendments, all properties purchased before July 23, 2024, will be protected under the old rules. Initially, the Budget proposal did not include such protection for properties bought after April 1, 2001. For properties purchased before that date, the fair market value as of April 1, 2001, was to be considered the acquisition cost. Essentially, "grandfathering" allows the application of an old rule to situations up to a certain date, while a new rule applies thereafter.

According to the key amendment, for the transfer of a long-term capital asset, such as land or a building (or both), by an individual or Hindu Undivided Family (HUF), which was acquired before July 23, 2024, the taxpayer can calculate their taxes under both the new scheme (12.5% without indexation) and the old scheme (20% with indexation) and pay whichever amount is lower. It’s important to note that the amendments allow taxpayers to choose between the old and new LTCG tax regimes only for properties acquired before July 23, 2024.