The removal of indexation benefit in respect of capital gains on secondary sale of properties will be beneficial where growth in property prices has surpassed inflation and risen at over 10 per cent, while it will be negative for investments with shorter duration.
On Tuesday, the Budget, in order to make the tax structure simpler and bring in parity across asset classes, lowered the tax rate on long term capital gains on non-financial assets to 12.5 per cent with no indexation benefit compared to the earlier rate of 20 per cent but with indexation benefit. Indexation benefit adjusts for the cost of inflation over a period of time, narrowing the gains between the cost price and sale price and thus lessening the tax impact. The indexation benefit will be available to older properties held prior to 2001.
The changed taxation is effective immediately.
“We believe the impact of this new regime is likely to be negative for holding periods of less than 5 years and where property price appreciation is moderate (less than 10 per cent per annum),” said CLSA in a note.
Neutral impact
The impact would be neutral or marginally beneficial for investments with a longer holding period of over 10 years and where the property price has grown at over 10 per cent.
Markets such as Bengaluru, Hyderabad and Pune, which are end-user driven will be the least affected while in markets such as the National Capital Region and Mumbai, where there is higher investor activity in the property market, it will have an adverse impact, the note said.
As to what impact it would have on the wider market, Kotak Institutional Equities said that it would have negligible effect on 75-80 per cent of the demand, while the impact on overall housing demand is likely to be limited. This is because the bulk of the purchases is for own use and around 20-25 per cent is for investment purposes. This would of course, vary from city to city depending on geographies that see more price appreciation than others.
The computation by CLSA on holding a period of property from 2 to 20 years and at various price growths gives a clear picture of the impact. The most impact in terms of tax outgo is on shorter tenures and lower property price growth. As the time of holding lengthens the impact lessens for the same price growth. There is lower tax outgo with higher appreciation in the property for the same tenure of holding.
Where the property has appreciated by over 10 per cent, the new tax regime starts to work in favour of the seller, with lower tax outgo compared to the old regime.