An unpleasant note was struck in the Budget proposals with the removal of indexation benefits on long term capital gains on property, while the tax rate on such gains without indexation is at 12.5 per cent
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“This will severely impact property sellers and consequently the real estate industry, which is a big employment generator in the economy,” said Vivek Jalan, Partner, Tax Connect Advisory Services LLP.
The amendments in long term capital gains tax are applicable with immediate effect.
So far, long term capital gains on property transactions were taxed at 20 per cent with indexation benefit. Indexation benefit adjusts the cost price for inflation and effectively brings down the gains in case of assets that have been held for a longer term. The removal of this benefit means that the seller of a property would be liable to pay tax on the entire gain made without adjusting for inflation.
Citing an example, Jalan said a property purchased in FY20 for ₹1 crore and sold in FY25 for ₹1.25 crore, would have an indexed cost of acquisition of ₹1.25 crore and would attract no tax, under the older regime. However, now it would attract 12.5 per cent tax on the gain of ₹25 lakhs, coming to ₹3.12 lakh tax outgo.
“The removal of indexation benefit for property and other assets will increase tax outflows,” said Bhavik Thakkar, CEO, Abans Investment Managers. It could also encourage sellers to suppress the sale value of their properties and accepting part consideration in cash in order to avoid paying higher taxes.
Both Jalan and Thakkar said it would potentially have an effect on the secondary sale of properties, especially when they have been held for a long time and the gains have been considerable.
For instance, a property acquired in 2001 for ₹100 and sold for ₹500 in 2024, if taxed at 20 per cent would have entailed a tax outgo of ₹27.4, while under the amended tax rules it would be ₹50.
It may not always have a negative impact, pointed out Knight Frank India’s National Director, Research Vivek Rathi. He pointed out that it would vary on a case to case basis on how long the property had been held and the pace of increase in property prices and inflation in the economy.