Property sales indexation change to benefit taxpayers, not for revenue increase: FinMin

Finance Ministry asserted on Wednesday that the Budget 2024 proposal to eliminate the indexation benefit for property sales was not a “revenue-raising measure” and that the new capital gains tax regime will not lead to a higher tax burden on real estate transactions. On the contrary, the new regime will benefit taxpayers in “almost all cases” through substantial tax savings, sources in the Finance Ministry said. 

Finance Minister Nirmala Sitharaman in her budget speech announced the rationalisation of the capital gains tax regime and the removal of indexation benefit for calculating long-term capital gains on non-financial assets including property. 

Put simply, in the case of real estate, the Budget 2024 announced a reduction in the long-term capital gains tax rate from 20 per cent with indexation benefit to 12.5 per cent without indexation.

This means that property owners wishing to sell their property will no longer be able to adjust their purchase price using inflation, which reduces their capital gains and minimises the resultant tax payout.

This latest budget proposal has sparked a controversy with many experts arguing that the removal of indexation benefit for real estate will place property sellers at a disadvantage due to a higher capital gains tax payout. 

Tax Equality

“Our intention to remove indexation is not to raise revenues. This is not a revenue-raising effort. The overall objective is to treat all asset classes at single long-term capital gains tax rate of 12.5 per cent whether it be gold, property or listed stocks”, top-level sources in the Finance Ministry said. 

These days, the nominal real estate returns are generally in the range of 12-16 per cent per annum, which is much higher than inflation. The indexation for inflation is around 4-5 per cent, depending on the holding period. “Therefore, substantial tax savings are expected for a vast majority of such taxpayers upon the implementation of the new regime”, sources added.

Benefit Threshold

To support the point that the new tax rate without indexation is beneficial for taxpayers in most cases, a top CBDT official said that for property held for five years, the new regime is beneficial when the property has appreciated 1.7 times or more. For property held for ten years, it is beneficial when the value has increased by 2.4 times or more. For property purchased in 2009-10, it is beneficial if the value has increased to 4.9 times or more, official sources said.

However, only where returns are low (less than about 9-11 per cent per annum) the earlier tax rate is beneficial. But such low returns in real estate are unrealistic in the current cycle (the post-Covid real estate cycle has been on an upswing) and are “rare” , they added.

The Finance Ministry sources also highlighted that on investment of capital gains in 54EC bonds (up to ₹50 lakh) or in buying or constructing a house (up to ₹ 10 crore), the capital gains are exempted from tax, subject to certain specified conditions. 

Post the budget announcement, many experts argue that the removal of the indexation benefit is largely detrimental for all those planning to sell their old properties. However, the Finance Ministry does not accept such a viewpoint. 

Investment impact

Meanwhile, foreign brokerage CLSA said in a research note on Tuesday that the budget proposal on real estate is unlikely to impact end-users who sell their existing house and reinvest in a new house. However, it will impact investors who sell their house (investment) and reinvest in other asset classes. “We believe the impact of this new regime is likely to be negative for investors with a holding period of less than five years and where property price appreciation is moderate (less than 10 per cent per annum)”, CLSA note added.

Jaxay Shah, Former President of real estate body CREDAI and Chairperson of the Quality Council of India said that the introduction of a new long-term capital gains tax rate of 12.5 per cent (without indexation) may offer a solution to the long-standing problem of cash transactions, particularly during land purchases. This attractive rate may incentivise landowners to opt for 100 per cent cheque payments and willingly pay 12.5 tax rate.