A day after the Union Budget removed the indexation benefit for the sale of properties, the real estate sector is still coming to grips with the change.The income tax department tried to clear the air with a series of tweets on Wednesday and said that the move will benefit a large number of taxpayers looking to sell properties.
The finance minister’s move to reduce long term capital gains (LTCG) tax rate from 20% with indexation to 12.5 % without indexation for real estate will benefit in almost all cases, the I-T department said.Indexation means adjusting the purchase price of a property for inflation, thereby reducing the gains and ultimately the tax liability.“Nominal real estate returns are generally in the region of 12-16% per annum, much higher than inflation. The indexation for inflation is in the region of 4-5% depending on the period of holding.
Therefore, substantial tax savings are expected to a vast majority of such tax payers,” the department said.But industry players have different views. Sanjay Dutt ,CEO and managing director at Tata Realty and Infrastructure, said while the government has reduced LTCG tax, it has removed indexation. So there is no benefit, he said, adding “they should have maintained indexation. How can you ignore inflation? Alternative, they should make it 5%,” he said.
Ritesh Mehta, senior director/head – north, east & west, residential services, India, JLL, said the removal of the indexation benefit for property sales, despite a reduced LTCG tax rate, will likely deter sellers in the secondary market due to higher taxable capital gains. “However, this phase won’t be prolonged, and first-time homebuyers remain unaffected. The steady growth of ready reckoner rates across cities ensures no increase in unaccounted money in real estate transactions,” Mehta said.
Gulam Zia, executive director at Knight Frank, said the weighted average growth in prices is not even 8% in the last three years. “This industry is cyclical. After the three-year upcycle, the tide could turn . Before this we had seen a downcycle of nine years. It is not in sync with the market,” Zia said.He said for a person buying and selling in a downcycle, it will be a double whammy of sorts. “I am not fully convinced that there is no loss due to the change of this regime,” Zia said.
Many others, however, agree with the I-T department’s view. Prashant Thakur, head of research at Anarock Property Consultants, said the sellers or investors are marginally better off with reduction in LTCG and indexation going away. Assuming that property prices went up 15% earlier, they were getting indexation benefit of 4-5% , and paying 20% tax on gains. Now they will pay 12.5% LTCG on the gains on similar increase in prices, he said.“So if the prices went up from Rs 100 to Rs 115, earlier they were paying 20% on Rs 11 after indexation. Now they will pay 12.5% on Rs 15,” he said.Suneel Pareek, executive director at Assetz Property Group, said if the internal rate of return for sellers exceeds 10-11%, it is beneficial for them. “If it’s between 5-10% , there is marginal impact; if it’s less than 5%, they are losing. In the past people have not paid any tax due to indexation,” he said.Sangram Baviskar ,co-founder and managing director-real estate at TruBoad Partners, said the impact of this change may vary depending on the type of property seller.
“Those who sell their primary residences to purchase new homes, which constitute a substantial portion of overall transactions, are less likely to be affected. On the other hand, investors who sell property investments to diversify into other asset classes could face different circumstances. There’s a possibility of increased tax liability for investors who typically hold properties for shorter periods,” Baviskar said.
Bhavik Thakkar, CEO, Abans Investment Managers, said the removal of indexation benefit for property and other assets will increase tax outflows. “For example, if you had bought a property for `100 in 2001 and sold it for `500 in 2024, as per earlier tax regime (when indexation benefit was allowed), the tax outflows even at 20% rate would have been Rs 27.4 (as cost inflation index for FY25 is 363) whereas as per the Budget announcement, the tax outflow at 12.50% rate would be Rs 50. This may potentially impact secondary sales of properties,” he said.