Government Proposal to Remove Indexation Benefit on Property Sales: Its Impact

The Union Budget 2024-2025 has introduced a significant change that has sparked discussions in the real estate sector: the proposal to remove the indexation benefit on long-term capital gains (LTCG) from property sales. This move, announced by Finance Minister Nirmala Sitharaman, aims to simplify the tax structure but comes with mixed reactions from property owners and investors.?

Let's understand what this means and its impact on the real estate market.

The Basics of Indexation and LTCG

What is Indexation?

Indexation is a method that adjusts the purchase price of an asset for inflation, thereby reducing the taxable capital gains when the asset is sold. This adjustment helps lower the tax liability for investors, making long-term investments more attractive.

Long-Term Capital Gains (LTCG)

LTCG refers to the profit earned from the sale of an asset held for a long period, typically over two years for real estate. With indexation, the taxable amount is significantly reduced, thus lowering the tax burden on the seller.

The Budget 2024 Change

Removal of Indexation Benefit

The Union Budget 2024 proposes the removal of indexation benefits for calculating LTCG on property sales. Instead, a flat LTCG tax rate of 12.5% will be applied. Previously, the LTCG tax was 20% with the benefit of indexation.

Impact on Real Estate

Sellers in the Secondary Market

• Higher Tax Burden: Without indexation, the taxable gains on property sales increase, leading to higher tax liabilities for sellers, particularly those who have held properties for over ten years.
• Example: Suppose a property was bought for ?20 lakhs in 1991-92 and sold for ?80 lakhs in 2009-10. With indexation, the purchase price would be adjusted to ?63.51 lakhs, resulting in a taxable gain of ?16.49 lakhs and a tax of ?3.29 lakhs at 20%. Without indexation, the taxable gain remains ?60 lakhs, leading to a tax of ?7.5 lakhs at 12.5%.

Investors

• Short-Term Investors: Investors with shorter holding periods (less than 5 years) will face higher taxes due to the lack of indexation, especially if property price appreciation is moderate.
• Long-Term Investors: For those holding properties for over 10 years with significant appreciation, the new regime might still result in higher taxes, despite the reduced rate.

Market Dynamics

• Reduced Seller Activity: The higher tax burden may deter sellers in the secondary market, potentially reducing the number of properties available for sale.
• First-Time Homebuyers: The changes are less likely to affect first-time homebuyers, who typically benefit from other government incentives.

Industry Reactions

Positive Outlook on Infrastructure Spending

Despite the removal of indexation benefits, the budget's continued focus on infrastructure and urban housing development offers significant growth opportunities for the real estate sector.

Mixed Reactions

• Authorities' View: Some authorities argue that the high nominal returns on real estate (12-16% per annum) mitigate the impact of the removal of indexation, as these returns are much higher than the inflation rate of 4-5%.
• Experts' View: Experts caution that in some cases, property returns are lower than inflation, making the removal of indexation more burdensome.

Adapting to the New Tax Regime

At Realty Smartz, we understand the complexities these changes bring to the real estate market. As a premier real estate consultancy in Gurgaon, we are committed to helping you navigate these new regulations with expert advice and personalized services.

The Union Budget 2024-2025 presents a mixed bag for the real estate industry. While the removal of indexation benefits introduces higher tax burdens for some, the government’s continued focus on infrastructure and urban housing development offers significant growth opportunities.?

As always, it’s essential for investors and homeowners to consult with financial experts like us to navigate these changes effectively and make informed decisions. Visit Realty Smartz today to get started on securing your real estate investments.