Why end of indexation benefit on property sale has ignited a debate

“Nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation. The indexation for inflation is in the region of 4-5 per cent, depending on the period of holding. Therefore, substantial tax savings are expected to a vast majority of such taxpayers,” a government official said.

“The new tax rate without indexation is beneficial in most cases. For property held for five years, the new regime is beneficial when a property has appreciated 1.7 times or more. For property held for 10 years, it is beneficial when the value has increased to 2.4 times or more. For property purchased in 2009-10, if value has increased to 4.9 times or more, it is beneficial. Only where returns are low (less than about 9-11 per cent per annum) that the earlier tax rate is beneficial but such low returns in real estate are unrealistic and rare (less than 10 per cent of the cases),” the official said.

The Budget on Tuesday proposed to remove the indexation benefit available for calculation of any long-term capital gains available for property, gold and other unlisted assets. It also proposed to rationalise capital gains tax on these assets at 12.5 per cent as against 20 per cent earlier that came with indexation benefit.

Officials said critics were judging the new regime in haste. Indexation benefits would be offered for property purchased before 2001, which would help people to take that benefit for ancestral property, an official said.

“The proposal was brought with an aim to bring every asset class that faces capital gains at par. We wanted to offer a simple treatment… This removes the differential rates for various classes of assets,” the official said, adding that the benefits have been extended with a hike in exemption limit of long term capital gains for certain financial assets to Rs 1.25 lakh per year from Rs 1 lakh.

Real estate industry experts said tax incidence for the new rate without indexation may be lower for properties held for shorter durations.

“If you are holding a property for a very long time and annual capital value growth is around 10-12 per cent, you will end up paying more tax in the new regime. If you’re holding it for a shorter time, I think it will become a little easier to liquidate. I think taxes for short-term holding will be lower. Short term as in 3-5 years should be good from a capital value appreciation perspective,” said Rohan Sharma, director at JLL India.

Industry players also said if rationalisation across asset classes was the objective, parity should have been restored for all applicable taxes and not capital gains taxes alone. “If we are treating real estate investments at par with equities, it invites serious rethinking in terms of stamp duty on resale. Stamp duty is 5-7 per cent of property value as opposed to 0.1 per cent securities transaction tax (STT) in India. There is no parity on the taxation front. If the objective is to make it simpler, then all parts of it have to be simple,” said Akhil Saraf, CEO of Reloy, a Mumbai-based proptech firm.