Finance Minister Nirmala Sitharaman on July 23 announced an increase in both long-term and short-term capital gains tax. The government has also proposed to do away with the indexation benefit for sale of property, which allowed property owners to adjust their gains for inflation, which real estate experts say may lead to higher tax burden on real estate transactions.
The budget has proposed that the short-term capital gains tax be increased from 15% to 20% but LTCG will be charged at a flat rate of 12.5%.
“Short-term gains on certain financial assets shall henceforth attract a tax rate of 20%, while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate,” Finance Minister Nirmala Sitharaman said during her Budget speech on July 23.
Long-term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5%. To benefit the lower and middle-income classes, the finance minister proposed to increase the limit of exemption of capital gains on certain financial assets to ₹1.25 lakh per year.
FM said that the indexation benefit for property sales would be removed. This means that property owners wishing to sell their property will no longer be able to adjust their purchase price using inflation, thereby reducing their capital gains. This will lead to an increase in tax liability.
Earlier, the long-term capital gains from property were taxed at 10% with indexation benefits. According to the Budget documents, the new tax rate for long-term capital gains on property sales will be 12.5% without indexation benefit.
How do the numbers stack up?
To cite an example, if one were to compute the long-term capital gains on a property that was purchased for ₹1 lakh in FY 20-21 and sold in FY 24-25 for ₹5 lakh, the indexed cost of acquisition would approximately be ₹1.2 lakh. The gains would be ₹3.8 lakh and the tax would be ₹76,000. Post the current change where there is no indexation available, the cost of acquisition would be ₹1 lakh, the gain would be ₹4 lakh and the tax would be ₹50,000.
“The numbers would change based on the year of acquisition and the cost of buying the property,” explains Gaurav Karnik, Partner and Real Estate National Leader, EY India.
Also Read: Budget 2024: Focus on digitisation of land records, Urban development gets a leg up
Indexation adjusts the purchase price of an asset for inflation, reducing taxable profits and tax liabilities. Without this adjustment, taxpayers may have to pay increased taxes despite the lower LTCG rate.
Removal of indexation benefits and the subsequent reduction in profitability from real estate transactions may lead to investors shying away from assets that are taxed at a higher rate.
“This would have a short- term impact on the investment demand for residential units, however considering the demand from end users and overall economic growth, this may not have a material impact on the residential sales,” said Anshul Jain, Chief Executive – India, SE Asia & APAC Tenant Representation, Cushman & Wakefield.
Sanjay Sanghvi, a Chartered Accountant (CA) and Partner, Khaitan & Co said, “The finance minister has made significant announcements in the budget in the capital tax regime wherein the income tax rate for long term capital gain has been increased from 10% to 12.5% and short-term capital gain has been increased from 15% to 20%, which will cause an additional burden to the taxpayers, who are already prone to high tax regime.”
Also Read: Budget 2024: 5 Things the real estate sector looks forward to from the finance minister
“The decision to remove the indexation benefit for long-term capital gains (LTCG) tax on real estate marks a significant shift for the sector. While the intention to simplify and rationalise the tax regime is clear, the removal of the indexation benefit, despite the reduction in the LTCG tax rate to 12.5%, could lead to a higher tax burden on real estate transactions,” said Dhruv Agarwala, Group CEO, Housing.com.
“Additionally, the government plans to promote homeownership by encouraging states to reduce stamp duty rates, particularly for women. This could significantly reduce the cost of property acquisition in India, a country where stamp duty rates are one of the highest in the world,” Agarwala added.
Some real estate experts are of the view that this may have a mixed impact on the real estate sector.
“‘The increase in the long-term capital gains tax rate to 12.5% from 10%, along with a new exemption limit of ₹1.25 lakh per year, and the rise in the short-term gains tax rate to 20% from 15%, will have a mixed impact. Real estate which had a 20% long term capital gain tax so far will benefit,” said Dominic Romell, President, CREDAI-MCHI- an apex body of real estate developers.
