The Centre’s decision to tweak the Budget proposal on long-term capital gains tax on immovable property transactions is welcome. The episode may, however, have cost it some of its capital with taxpayers. The Budget had proposed a major change in the principles of taxation for long term capital gains on several assets by doing away with the concept of indexation, which had been in the statute for over two decades.

Tax laws allowed sellers to adjust the original purchase price of certain assets for inflation over the holding period, before calculating the capital gains that were liable to tax. The Budget, with immediate effect, dispensed with this indexation facility while simultaneously lowering the tax rate. This meant that buyers of immovable property (and a few other assets) were liable to pay long-term capital gains tax on the entire sale proceeds at a flat rate of 12.5 per cent for any sale made on or after July 23, instead of the prevailing 20 per cent tax on indexed gains.

This change was akin to retrospective taxation, because taxpayers who acquired property prior to July 23, 2024, are likely to have based their decision on the availability of indexation benefits, as per extant tax laws. After an uproar, the government has now sought to dial down the proposal. Thus, taxpayers who acquired immovable property prior to July 23 will now be given the choice of either opting for long term capital gains tax at 20 per cent with indexation benefits, or a flat 12.5 per cent tax without any indexation, whichever is beneficial to them. Those who purchase property on or after July 23, 2024, will not enjoy any indexation and will need to pay tax at the flat rate of 12.5 per cent on their gains when they sell the property.

The decision to tax capital gains from property without too many concessions is unexceptionable. The Income Tax Act already allows taxpayers to shield capital gains on self-occupied homes by reinvesting in property or Section 54EC bonds up to reasonable limits. Yet, this episode does raise some questions on the process of policymaking, especially Budget tax proposals. The Centre should practice what it preaches to regulators such as SEBI and RBI: consult stakeholders before framing policies. Is it too much to expect policymakers to float consultation papers on such tax proposals that significantly alter or amend the existing provisions? At the very least, feedback and views can be sought from stakeholders and analysts during pre-Budget consultations when such major changes are being considered. This will help the government to assess in advance the impact of the changes it seeks to make and appropriately amend the tax laws. This is surely more elegant than to propose a change unilaterally in the Budget, only to be forced to tweak it based on subsequent feedback.