Thanks to the removal of indexation benefits in the Union Budget 2024, there could be a significant increase in long-term capital gains (LTCG) tax, according to an analyst report by BankBazaar on Friday. This could lead to LTCG tax going up by 290 per cent on properties purchased after 2010.
“Without indexation, the LTCG taxes rise significantly for all holding periods. Longer holding periods correlate with higher taxes with or without indexation. Without indexation, the taxes are comparatively higher,” according to BankBazaar analyst report.
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.
In the Union Budget 2024-25, indexation benefits on property sales were eliminated. FM Nirmala Sitharaman announced the removal of indexation benefits for property sales and the reduction of 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, investors will now have to pay capital gains tax based solely on the difference between the purchase and selling prices, without any inflation adjustment.
Here’s how BankBazaar analysis calculated the increase of LTCG tax for properties purchased post-2010:
Calculation: Based on simulations, calculate the additional LTCG tax applicable without indexation benefits for the above locations for holding periods ranging from two years to 13 years. Use the annual Q4 values as purchase prices and set base value = 100 for Q4-2010-11 for all locations. Consider the Q4-2023-24 as exit prices. Calculate LTCG over holding periods of two to 13 years ending in Q4-2023-24. Measure LTCG with and without indexation. Measure and compare taxes on both sets of LTCG. Calculating additional taxes is now applicable due to non-indexed LTCG.
Key All India Findings: According to the BankBazaar report’s all India key findings, the average indexed tax on LTCG in these 13 years is 3.90. This average non-indexed tax rises 2.90 times to 11.34, implying additional taxes of 7.44. Similarly, the median tax rises 12.10 times from 0.83 to 10.05. The actual simulated taxes for all periods will be larger post the updated house price index (HPI) values for Q2-2024-25 and Q3-2024-25. For short-term holdings, all taxes with indexation were 0.00 from 2016-17. Without indexation, the taxes rise significantly with values of 3.02 to 8.70.
City-Level Findings: According to the BankBazaar report’s city-wise findings, Mumbai has the highest average additional tax at 7.02. Kolkata is next at 6.71. The city sees a 500x jump in applicable taxes for properties purchased in 2014-15, and a 106x increase for properties purchased in 2017-18 – the two highest such values in the study. Delhi and Jaipur, with largely 0.00 tax with indexation, now have higher taxes with the new rules.
All India LTCG: Due to indexation, there’s no LTCG from 2016-17. These seven years reflect long-term capital losses. Therefore, despite the 20 per cent tax rate, the investor’s tax liability would be zero in these years. However, without indexation, there are huge leaps in the LTCG for all years including from 2016-17. “There’s a severe loss of tax savings especially in the years from 2016-17. From the zero tax liability, we see significant liabilities arising for these years. The longer the holding periods, the larger the tax liabilities are,” according to BankBazaar report.
How Will This Impact Long-Term Real Estate Investors: According to the BankBazaar report, while the removal of indexation is meant to simplify and streamline the tax system, it might have significant financial implications for the property owners.
According to Hemal Mehta, Partner, Deloitte India, removal of indexation could lead to higher taxes for homebuyers who want to sell assets held for more than 10 years. “The removal of indexation will significantly impact the real estate investors. While it is certainly simplifying tax rates, it will be important to consider its impact on the long-term investors,” says Adhil Shetty, CEO of BankBazaar.
