Real Estate Indexation Benefits Removed; To Lead To Capital Gains And Higher Amount Of Taxes For Homebuyers

Removing indexation benefits from real estate results will lead to capital gains and a higher amount of taxes for homebuyers. In the Union Budget 2024-25, indexation benefits on the sale of a property were eliminated. FM Nirmala Sitharaman announced the removal of indexation benefits for property sales and the reduction of Long Term Capital Gains (LTCG) tax from 20 per cent to 12.5 per cent. These benefits allowed sellers to adjust the property's cost for inflation, effectively lowering their taxable profits. As a result of this change, investors will now have to pay capital gains tax based solely on the difference between the purchase and selling prices, without any inflation adjustment. 

Indexation typically refers to the adjustment of the purchase price of an asset, factoring in inflation, thereby bringing down taxable profits, In the real estate sector, this could be any property. 

According to the Budget document: “With the rationalization of the rate to 12.5 per cent, the indexation available under the second proviso to Section 48 is proposed to be removed for the calculation of any long-term capital gains, which is presently available for property, gold, and other unlisted assets. This will ease the computation of capital gains for the taxpayer and the tax administration.” The new rules are effective from July 23, 2024 onwards, with immediate effect. 

According to experts, removing indexation benefits for long-term capital gains in real estate will impact the property owners’ holding assets for over 10 years. Also, this move could lead to higher taxes for homebuyers who want to sell assets held for more than 10 years. 

Says Hemal Mehta, Partner, Deloitte India: “Indexation was designed to give the benefits to the seller on the time value of money.  When the same is removed, the home buyer selling a residential house and buying another will need to make sure two things (I) transaction value is less than Rs 10 cr and (ii) the seller will have comfort in investing a larger share of sale proceeds in another residential house. Removal of indexation will result in higher capital gains and resultantly higher amounts of tax at 12.5 per cent vis-a-vis 20 per cent post-indexation benefit - one needs to weigh the pros and cons of each deal.” 

The decision to remove the indexation benefit may lead to a disparity between the demand and supply of real estate assets, resulting in supply reduction in the secondary market and limited demand in the primary market. “However, the overall effect depends on several factors such as the rate of appreciation in asset value, inflation, and tenure of holding the asset. It will be interesting to see how buyers, sellers, and developers adjust to the new tax regime,” says Shrinivas Rao, FRICS, CEO, Vestian.  

However, according to some tax experts, at first glance, it may seem that removing the indexation benefit will increase the taxpayer's tax liability. However, this isn't the full picture, as the FM also proposes reducing the tax rates on long-term capital gains from 20 per cent to 12.5 per cent. “Therefore, the impact of these proposed changes on homebuyers can vary, depending on circumstances. For instance, if you bought a house in 2014 for Rs 5 lakh and sold it in 2024 for Rs 7 lakh, you would have a long-term capital loss if indexation benefits were allowed. However, under the new budget proposals, you would need to pay tax at 12.5 per cent on the Rs 2 lakh gain,” says Rahul Singh, senior manager, Taxmann, tax and corporate advisor. 

“There may be situations where homebuyers will get benefit from the removal of the indexation benefit. This would occur when the property price significantly increases over a short period. In this case, tax liability would be lower under the new budget proposals,” adds Singh.