Experts Concerned as Govt Proposes LTCG Tax Change for Property Sales

The government has proposed reducing the long-term capital gains (LTCG) tax on immovable properties from 20% to 12.5%, but it plans to remove the indexation benefits that adjust for inflation. Experts believe this move could negatively impact sellers. The Union Budget Memorandum states that with the new rate of 12.5%, indexation under Section 48 of the Income Tax Act will be removed for calculating LTCG on property, gold, and other unlisted assets.

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Impact on Taxpayers

Finance Secretary T V Somanathan explained that a 12.5% tax rate without indexation is higher than a 20% rate with indexation in most cases. He said, "In 95 per cent cases, this 12.5 per cent will benefit. Due to this change, the middle class will benefit." However, the indexation benefit will still apply to properties bought before 2001.

Deloitte India Partner Aarti Raote commented that removing indexation would significantly impact taxpayers. She noted, "The indexation benefit was provided to increase the cost of the asset to the current value and the gain is then computed against the sale consideration." Without this adjustment for inflation, taxpayers will pay tax on the difference between the actual cost and sale consideration, which could be substantial.

Sectoral Concerns

Anupama Reddy from ICRA mentioned that despite a lower LTCG tax rate, removing indexation at the time of sale would likely result in higher taxes for residential real estate. She stated, "Hence, this is negative for the sector." Similarly, Aniket Dani from CRISIL Market Intelligence and Analytics said that while reducing the LTCG tax rate is positive, removing indexation is largely negative for those selling older properties.

Dhruv Agarwala, CEO of Housing.com and PropTiger.com, remarked that removing indexation marks a significant shift for real estate. He said, "While the intention to simplify and rationalise the tax regime is clear, the removal of the indexation benefit... could lead to a higher tax burden on real estate transactions."

Industry Reactions

Samir Jasuja, Founder and CEO of PropEquity, believes that removing indexation could hinder real estate growth and slow down efforts to achieve a USD 1 trillion real estate economy. Vivek Jalan from Tax Connect highlighted that LTCG taxation previously benefited from inflation-adjusted indexation. He said, "Now indexation has been proposed to be removed... This will severely impact property sellers and consequently the real estate industry."

Jalan also warned that resale properties might be severely impacted and could lead to an increase in cash transactions where sellers might suppress their sale values further. Former CREDAI president Jaxay Shah suggested that if average returns on property are around 12% over more than four years with inflation at 5%, the impact of these changes would be neutral.

The proposed changes aim to simplify capital gains calculations but may lead to higher taxes for many property sellers. The removal of indexation benefits could have significant implications for both individual taxpayers and the broader real estate market.