Government to remove indexation benefit of old property sales; Budget

24 Jul 2024 CW Team

In a significant policy shift, the government proposed reducing the long-term capital gains (LTCG) tax on immovable properties from 20% to 12.5% while eliminating the indexation benefits that adjust for inflation. This move, aimed at simplifying tax calculations, has been met with mixed reactions from experts who see it as potentially negative for property sellers. According to the Memorandum to the Union Budget, the rationalisation to a 12.5% rate involves removing the indexation available under Section 48 of the Income Tax Act, which currently applies to property, gold, and other unlisted assets. "This will ease the computation of capital gains for the taxpayer and the tax administration," it stated. Key Points: - Finance Secretary T V Somanathan explained that the new 12.5% rate without indexation is higher than the previous 20% rate with indexation, benefiting the middle class in 95% of cases. - The indexation benefit will still apply to properties purchased before 2001. Industry Reactions: - Aarti Raote, Partner, Deloitte India emphasised that the removal of the indexation benefit would significantly impact taxpayers, as they would now pay tax on the difference between the actual cost and the sale consideration, leading to higher tax burdens without inflation adjustments. - Anupama Reddy, Vice President and Co-Group Head (Corporate Ratings), ICRA pointed out that despite the reduced tax rate, the removal of indexation will likely result in higher taxes for long-term residential real estate returns. - Aniket Dani, Director-Research, CRISIL Market Intelligence and Analytics noted that while the reduced tax rate is positive, the removal of indexation is largely negative for those planning to sell older properties. - Dhruv Agarwala, CEO, Housing.com and PropTiger.com remarked that the removal of indexation, despite the tax rate cut, could lead to higher tax burdens on real estate transactions, marking a significant shift for the sector. - Samir Jasuja, Founder and CEO, PropEquity expressed concerns that the removal of indexation could hinder the growth of the real estate sector and slow down the vision of achieving a $1 trillion real estate economy. - Vivek Jalan, Partner, Tax Connect highlighted that the proposed removal of indexation would severely impact property sellers and could lead to a resurgence of cash transactions in the property market to suppress sale values. - Jaxay Shah, Former President, CREDAI mentioned that the impact would be neutral if property returns average 12% over more than four years and inflation is at 5%. However, if returns exceed 12% with the same inflation rate, the proposed changes could result in tax savings. (Source: ET)

In a significant policy shift, the government proposed reducing the long-term capital gains (LTCG) tax on immovable properties from 20% to 12.5% while eliminating the indexation benefits that adjust for inflation. This move, aimed at simplifying tax calculations, has been met with mixed reactions from experts who see it as potentially negative for property sellers. According to the Memorandum to the Union Budget, the rationalisation to a 12.5% rate involves removing the indexation available under Section 48 of the Income Tax Act, which currently applies to property, gold, and other unlisted assets. This will ease the computation of capital gains for the taxpayer and the tax administration, it stated. Key Points: - Finance Secretary T V Somanathan explained that the new 12.5% rate without indexation is higher than the previous 20% rate with indexation, benefiting the middle class in 95% of cases. - The indexation benefit will still apply to properties purchased before 2001. Industry Reactions: - Aarti Raote, Partner, Deloitte India emphasised that the removal of the indexation benefit would significantly impact taxpayers, as they would now pay tax on the difference between the actual cost and the sale consideration, leading to higher tax burdens without inflation adjustments. - Anupama Reddy, Vice President and Co-Group Head (Corporate Ratings), ICRA pointed out that despite the reduced tax rate, the removal of indexation will likely result in higher taxes for long-term residential real estate returns. - Aniket Dani, Director-Research, CRISIL Market Intelligence and Analytics noted that while the reduced tax rate is positive, the removal of indexation is largely negative for those planning to sell older properties. - Dhruv Agarwala, CEO, Housing.com and PropTiger.com remarked that the removal of indexation, despite the tax rate cut, could lead to higher tax burdens on real estate transactions, marking a significant shift for the sector. - Samir Jasuja, Founder and CEO, PropEquity expressed concerns that the removal of indexation could hinder the growth of the real estate sector and slow down the vision of achieving a $1 trillion real estate economy. - Vivek Jalan, Partner, Tax Connect highlighted that the proposed removal of indexation would severely impact property sellers and could lead to a resurgence of cash transactions in the property market to suppress sale values. - Jaxay Shah, Former President, CREDAI mentioned that the impact would be neutral if property returns average 12% over more than four years and inflation is at 5%. However, if returns exceed 12% with the same inflation rate, the proposed changes could result in tax savings. (Source: ET)

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