Removal of indexation benefit in real estate will deter sellers in the secondary market

New Delhi [India], July 24 : The real estate sector has cautioned the government that the proposal to remove indexation benefits for long-term capital gains in real estate will hurt the growth of the sector.
"The removal of the indexation benefit for long-term capital gains in real estate is likely to significantly impact property owners' holdings assets for more than ten years. Owners of heritage homes may face a higher tax burden upon sale, as the absence of indexation prevents adjusting the property's cost basis for inflation. The change could result in higher taxes for individuals who want to sell assets held for more than ten years" said Niranjan Hiranandani, Chairman, NAREDCO.
The budget 2024-25 has proposed a flat budget 2024-25 of 12.5 per cent on capital appreciation on selling a property with no indexation benefits.
However, the Income tax department does not agree with the views of Hiranandani. In a social media post on Wednesday, the Income tax department denied this that people will have to pay higher taxes on profits made on selling a house on the premise that nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation rate of 4-5 per cent.
The real estate leaders agree and say that the growth factors and the bullish economy, along with a simplified tax structure, suggest that in cases of higher capital appreciation, the new regime could work better.
However, the clarification by the Income tax department that the real estate returns are generally higher than the inflation rate is also not true in absolute terms, the real estate experts have clarified that in some cases the returns are way below the inflation rate if the property is kept for a longer duration.
"The removal of the indexation benefit for property sales, despite a reduced LTCG (Long Term Capital Gains Tax) tax rate, will deter sellers in the secondary market due to higher taxable capital gains. However, this phase will not be prolonged, and first-time homebuyers remain unaffected. The steady growth of Ready Reckoner rates across cities ensures no increase in unaccounted money in real estate transactions" said Ritesh Mehta, Senior Director/Head, North, East & West, Residential Services, India, JLL.
The industry leaders however are positive that the new investors holding properties for more than 2 years will benefit from the lower long-term capital gains tax, potentially making short- and mid-term investments more attractive.
The income tax department also added that simplification of any tax structure has the benefits of ease of compliance in computing taxes, filing, and maintaining records. The new proposal has also removed the differential rates of taxes for various asset classes.