Is Govt Exploring ‘Grandfathering Rule’ To Ease Short-Term Pain Due To Indexation Benefit Removal?

In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman removed the indexation benefit from long-term capital gain (LTCG) as part of efforts to simplify tax rules. This decision, however, has led to concerns in certain quarters, like the real estate sector, which even drew sympathies from some members of parliament. While removing indexation, the government also reduced the LTCG from 20 per cent to 12.5 per cent. Given the disappointment felt in certain sections over indexation, according to a CNBC report, the government will likely explore options to provide relief, specifically to the real estate sector. Indexation is a concession provided to taxpayers by adjusting the purchase price or the asset’s cost with inflation, reducing the capital gain. Reduced LTCG means lower tax liability. However, the removal of indexation will create a greater tax burden. As such, it might encourage some people to use more cash in real estate transactions to keep the purchase price high while hoping to reduce the tax liability from LTCG. Also Read: Banks Warn Of APK Frauds: What Are They And How You Can Protect Yourself Against Them?

Options Govt Could Explore

According to the report, the government could be exploring the “grandfathering rule” in real estate, which may allow indexation to continue as per previous rules for transactions done before July 2024. Grandfathering allows a previous rule to continue up to a specific date before a new rule is implemented. For instance, grandfathering is allowed in mutual funds purchased up to January 31, 2018, which can continue receiving the indexation benefit. The government may also allow taxpayers to choose between the old and new tax regimes for real estate transactions, offering them more flexibility to select a suitable financial option. However, if the law is amended, it will be restricted only to real estate transactions. Additionally, the government is not likely to reverse its decision on indexation, although it could explore measures to reduce the impact. Since several industries raised concerns over indexation, the finance minister might respond to them in her Finance Bill. Also Read: India’s Per Capita Income Will Take 75 Years To Reach A Quarter Of That Of US: World Development Report 2024 Presenting the Budget in Parliament last month, the finance minister also announced several other changes in tax rules while promising to conduct a comprehensive review of the Income-tax Act, 1961, simplify the reassessment process, and provide more tax relief to ordinary citizens. For instance, under the new income tax regime in FY25, she hiked the standard deduction for salaried employees to Rs 75,000 from Rs 50,000. She also raised the deduction limit for employers’ contributions to the National Pension System (NPS) from 10 to 14 per cent. Also, she increased the deduction on family pension for pensioners to Rs 25,000 from Rs 15,000.