Budget 2024: Government proposes to remove indexation benefit on sale of old property
The Indian government has proposed reducing the long-term capital gains (LTCG) tax on immovable properties from 20% to 12.5%. However, this reduction comes with a catch—the government intends to remove the indexation benefits, which allow sellers to adjust for inflation when calculating LTCG. Experts have described this move as “negative” for sellers in the real estate industry.
Impact on taxpayers
According to the Memorandum to the Union Budget, the removal of indexation benefits will simplify capital gains computation for taxpayers and the tax administration. Finance Secretary T V Somanathan has stated that the proposed 12.5% tax rate without indexation benefit will benefit 95% of cases and particularly benefit the middle class. However, this change could have a significant impact on taxpayers who will now have to pay tax on the difference between the actual cost and the sale consideration, resulting in a potentially higher tax burden.
Negative impact on the real estate sector
Real estate industry experts have expressed concerns about the removal of indexation benefits. Anupama Reddy, Vice President and Co-Group Head Corporate Ratings at ICRA, believes that despite the reduction in the LTCG tax rate, the removal of indexation benefits will result in a higher tax outgo for sellers in the long run. This negative impact could hinder the growth of the real estate sector and slow down the vision of achieving a USD 1 trillion real estate economy.
Dhruv Agarwala, CEO of Housing.com and PropTiger.com, also emphasized the significant shift this proposal represents for the sector and highlighted the potential higher tax burden on real estate transactions. PropEquity Founder and CEO Samir Jasuja echoed this sentiment, stating that the removal of indexation benefits could hamper the growth of the real estate sector.
Economic implications
Vivek Jalan, a partner at the multi-disciplinary firm Tax Connect, points out that the removal of indexation benefits will severely impact property sellers and the real estate industry as a whole, which plays a significant role in employment generation. Furthermore, this change could lead to the suppression of sale values and the rise of a cash economy.
Jaxay Shah, former president of the Confederation of Real Estate Developers’ Association of India (CREDAI), suggests that the impact of the proposed changes would be neutral if the average return on property is assumed to be 12% over a period of more than 4 years, with inflation at 5%. However, if the average return on investment exceeds 12% and inflation remains at 5%, the proposed amendment could result in tax savings compared to the current tax rate.
Critical reception and conclusion
The proposed removal of the indexation benefit on the sale of properties has generated mixed reactions across the industry. While some experts appreciate the reduction in LTCG tax rate, the removal of indexation benefits has raised concerns about its impact on sellers and the real estate sector. As the budget proposal progresses, it remains to be seen how the government will balance the objectives of simplifying taxation and promoting the growth of the real estate industry.
