Real estate transactions had enjoyed lower effective tax rates due to indexation benefits that adjusted for inflation before levies were made. With the union budget removing indexation benefits across asset classes, a higher appreciation in property prices would actually reduce the tax payout for real estate investors.
If the returns are higher, the new long-term capital gains (LTCG) will actually be better for real estate investors, calculations showed. Interestingly enough, the converse is also true. Investors who have lower returns from the property would end up paying more than double the existing taxes under the new regime.
To put it simply, a property worth ₹10 lakh bought in 2004-05, which has gone up 20 times in value, would bring a tax bill that is lower for the same asset that has appreciated five times under the new regime, calculations showed. (See illustration below)
The long-term capital gains on real estate was 20% with indexation benefits. Though LTCG has been reduced to 12.5%, there will be no indexation benefits now. The cut-off date for the taxation has been kept at April 1, 2001 with those inheriting or buying property from that date being liable for the revised levy. If a person had inherited or acquired property before April 1, 2001, she/he will continue to be taxed at fair value.
Let us illustrate the impact of both with an example:
Years | Price 20 times in 23 years in Rs | Price 5 times in 23 in Rs |
Cost of acquisition | 10,00,000 | 10,00,000 |
| Date of buying April 1, 2001 FY 2001-2002 Cost of Inflation Index (CII) | 100 | 100 |
FY 2024-2025 Cost of Inflation Index (CII) | 363 | 363 |
Indexed cost | 3,63,00,000 | 3,63,00,000 |
Sale Price (20 times or 5 times) | 2,00,00,000 | 50,00,000 |
New Tax @14.95% (12.5% capital gains tax, 15% surcharge and 4% cess) for ₹1,90,00,000/ ₹40,00,000 | 28,40,500 | 598000 |
Old Tax @20% of ₹1,63,70,000/ ₹13,70,000 | 3,27,704 | 39,15,704 |
So, the tax savings in the new LTCG regime is actually about ₹10.75 lakh if your property value jumps by 20 times. But your tax outgo nearly doubles if the same property appreciates by 5 times and you have to shell out around ₹2.7 lakh extra in taxes.
“If the property's value has increased more than the inflation rate, the new 12.5% tax rate is expected to be more advantageous for real estate sellers compared to the previous 20% tax rate after adjusting for indexation,” said Shishir Baijal, Chairman and Managing Director, Knight Frank India, a property consultancy firm.
“We find that the new capital gains tax structure for real estate favours investors, who have generated high IRRs (internal rate of return), while investors with poor IRRs would be worse off in the new regime. On the other hand, it is expected to have limited impact on end users who purchase homes for personal consumption,” said Pankaj Kumar, Vice President, Fundamental Research, Kotak Securities.
Indexation adjusts the price of the asset for inflation reducing capital gains. It is calculated using the ‘Cost of Inflation Index (CII)’ to account for the inflation during the holding period of the asset. The government has set 2001-02 as the base year for the index with a CII of 100. The CII for 2024-25 stands at 363.
But analysts, observers and taxpayers are not so cheerful about the move on tweaking LTCG for real estate and said that it will lead to an increase in cash transactions in property transactions.
“The removal of indexation benefit for LTCG will impact the real estate industry and will slow down the resale of residential flats /lands. There is a fear that it may also increase the proportion of cash transaction in real estate deals, which will be again be counterproductive,” saidNilesh Sharma, President & Executive Director, SAMCO Securities.
“Removal of indexation benefits will increase the tax incidence on property sale, especially for older properties,” said Gautam Shahi, Director, Crisil Ratings.
Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.
