Removing Indexation Benefits: A 290% Hike in LTCG Tax on Properties Bought After 2010
The removal of indexation benefits on property sales has led to a significant increase in long-term capital gains (LTCG) tax liabilities for property owners across India.
Ltcg TaxIndexation BenefitsProperty SalesReal EstateTaxationBankbazaarSinghania CoValue ResearchReal EstateJul 26, 2024
Prior to the budget, different LTCG rates were applied to various financial and non-financial assets. For example, selling an equity investment held for over a year attracted a 10% LTCG tax, while non-financial assets such as real estate and gold were taxed at 20%. However, a flat LTCG tax of 12.5% has been introduced to simplify taxation.
The removal of indexation means that the original purchase price of the property will be used to calculate capital gains, without any adjustment for inflation. This will typically result in a higher taxable profit and, consequently, a higher tax liability.
For instance, imagine you bought a property for Rs 50 lakh in 2014-15 and sold it for Rs 1 crore before the budget. You'd have been able to adjust the cost price of the property with inflation, which means the cost price would have been marked up to around Rs 75.6 lakh. The gain of around Rs 24.4 lakh would then be taxed at 20%, resulting in a tax of approximately Rs 4.87 lakh. Now, without indexation, the property's cost price remains Rs 50 lakh when selling the property for Rs 1 crore. This means you'll pay a 12.5% tax on the Rs 50 lakh gain, amounting to Rs 6.25 lakh.
A study by Bankbazaar compared the tax implications of property sales with and without indexation, considering different holding periods and property values. The findings are stark the average LTCG tax without indexation has jumped by a staggering 290% compared to the tax levied with indexation. Longer holding periods witnessed even more significant tax hikes, with some cases showing a 500% increase in tax liability. Cities like Mumbai and Kolkata have been particularly hard hit, with taxpayers facing exceptionally high tax burdens.
The removal of indexation, coupled with the introduction of a flat 12.5% LTCG tax rate, has effectively eroded the benefits of long-term property ownership. This change is expected to dampen investment sentiments in the real estate sector and potentially discourage long-term holding of properties.
BankBazaar is a leading online marketplace that enables consumers to compare and apply for credit cards, personal loans, home loans, and other financial products. The company has partnered with various leading financial institutions to provide a wide range of financial products to its customers.
Singhania & Co is a leading chartered accountancy firm that provides a range of services including taxation, auditing, and financial advisory services.
Value Research is a leading research and analytics firm that provides data and insights on various financial products and services.
Frequently Asked Questions
What is indexation?
Indexation is a method used to adjust the purchase price of an asset, like property, to account for inflation over time.
How does the removal of indexation affect LTCG tax?
The removal of indexation means that the original purchase price of the property will be used to calculate capital gains, without any adjustment for inflation, resulting in a higher taxable profit and, consequently, a higher tax liability.
What is the new LTCG tax rate introduced in the Union Budget 2024?
A flat LTCG tax rate of 12.5% has been introduced to simplify taxation.
How does the removal of indexation benefit affect property owners?
The removal of indexation benefit has resulted in a substantial increase in tax liabilities for property owners across India.
What is the impact of this change on the real estate sector?
This change is expected to dampen investment sentiments in the real estate sector and potentially discourage long-term holding of properties.
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