Revive Indexation Benefits for Long-Term Capital Gains
The removal of indexation benefits in capital gains calculation has sparked debate. While the government claims it's beneficial, experts argue it will lead to higher tax liabilities for property sellers.
Indexation BenefitsCapital GainsLong Term Capital GainsProperty TaxesReal EstateBudget 2024 25Real EstateJul 28, 2024
The removal of indexation benefits means that the cost of acquisition will no longer be adjusted for inflation during the period the asset was held. This will result in higher capital gains and subsequently, higher tax outgo for the seller. While the government has lowered the long-term capital gain (LTCG) tax rate to 12.5% from 20%, the absence of indexation benefits will offset this benefit in many cases.
In reality, property prices in India have been growing at a rate of 12-16% per annum, whereas the indexation provided for inflation is around 4-5%. This means that the removal of indexation benefits will disproportionately affect property sellers who have seen slower growth in their assets.
A separate study has shown that even when the asset value has increased by 8% p.a., the seller's tax liability goes up. For instance, if a property was bought at Rs. 50 Lakhs in 2019 and sold now for Rs.73.47 Lakh, LTCG works out to be higher by Rs.80,057!
Furthermore, the average growth in value for real estate assets in India has been below 10% in the last five years, with some cities like Chennai and Mumbai recording growth rates as low as 2% and 1%, respectively. In this scenario, the removal of indexation benefits is likely to result in higher tax liabilities for property sellers.
To mitigate this issue, the government could consider restoring the benefit of indexation for long-term capital gains, particularly in cases where the average growth in asset price per annum is below 9%. Alternatively, the government could tweak the provision to lower the tax rate further to protect property sellers' interests.
In any case, a review of this proposal is in order to ensure that it does not disproportionately affect property sellers who have seen slower growth in their assets.
Frequently Asked Questions
What is indexation benefit in capital gains calculation?
Indexation benefit refers to the facility whereby one can enhance the cost of acquisition by adjusting with inflation during the period the asset was held, resulting in lower capital gains and subsequently, lower tax outgo for the seller.
Why was the indexation benefit removed in the budget proposal?
The government claimed that the removal of indexation benefits is part of its effort to rationalize and simplify capital gains taxes, but experts argue that it will lead to higher tax liabilities for property sellers.
How will the removal of indexation benefits affect property sellers?
The removal of indexation benefits will result in higher capital gains and subsequently, higher tax outgo for property sellers, particularly those who have seen slower growth in their assets.
What is the average growth in value for real estate assets in India in the last five years?
The average growth in value for real estate assets in India has been below 10% in the last five years, with some cities recording growth rates as low as 2% and 1%.
What can the government do to mitigate the effects of the removal of indexation benefits?
The government could consider restoring the benefit of indexation for long-term capital gains, particularly in cases where the average growth in asset price per annum is below 9%, or tweaking the provision to lower the tax rate further to protect property sellers' interests.
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