As the Finance Minister Ms Nirmala Sitharaman announced to lower the LTCG (Long Term Capital Gains) from 20% to 12.5%, the stock market took a hit. The analysts across the financial spectrum immediately swung into analysis that the LTCG hike would adversely affect the stock market in the short term but big pocket investors won’t be affected as much as presumed.
A section of financial wizards who understand the nuances of personal finance across the asset classes had even bigger a worry – Real Estate. Prima facie what looked like the LTCG being lowered from 20% to now at 12.5%, has in fact hurt the property market the most. Reason: the indexation benefit under Section 48 that is presently available for property, gold, and other unlisted assets have been now proposed to be removed.
Let’s illustrate the combined impact of reducing the LTCG rate and eliminating indexation over a 25-year holding period.
Scenario I:
Purchase Price: INR 1,00,00,000
Sale Price after 25 years: INR 5,00,00,000
Inflation Rate: 5% annually
Before Changes (with Indexation):
Indexed Purchase Price: INR 1,00,00,000 (1 + 0.05)^25 ≈ INR 3,38,63,225
LTCG: INR 5,00,00,000 – INR 3,38,63,225 = INR 1,61,36,775
Tax at 20%: INR 1,61,36,775 = INR 32,27,355
After Changes (without Indexation):
No Indexation: LTCG = 5,00,00,000 – 1,00,00,000 = 4,00,00,000
Tax at 12.5%: INR 4,00,00,000 = INR 50,00,000
Scenario II:
Someone bought an apartment 10 years back at INR 1,00,00,000
Today the price of the apartment is INR 2,00,00,000
CAGR Return: Accounting Rule 72 applied 72/10 = 7.2%
Let’s calculate LTCG with Indexation
Now in April 2014 Cost Inflation Index was 240
In April 2024 Cost Inflation Index is 363
So, 1crore property indexation 1 cr X 363 divided by 240=1,51,25,000
Gain is INR 48,75,000
20% LTCG is INR 9,75,000
Now without Indexation at 12.5%, same amount is INR 12,50,000
Thus, while the tax rate is reduced, the elimination of indexation over a long holding period significantly increases the taxable amount, resulting in higher tax liability. Additionally you even need to check the replacement cost if you have a bigger family and need another house now. Also, what about the cost of improvement, there also the indexation benefit has gone.
Naushad Panjwani, Chairman of Finance, Corporate and Allied Laws Committee of Bombay Chartered Accountants’ Society, finds a bigger worry in the present scenario. He questions, what if one has to sell his house in case of some emergency, like say a medical emergency in the family, and one has no option but to sell it at lower than the market price. Can you imagine the losses an average poor man will have to suffer in this case.
“There is also the issue of circle rate anomaly and in many places the circle is way higher (due to new luxury supply in the market) than the actual market rate for the old buildings. What will a buyer do in this case? It is a double whammy, because first he will have to settle stamp duty at a higher price and then again will be assessed by the Income Tax at a higher rate. Isn’t it injustice? Won’t it further encourage more cash transactions in many cases,” questions Panjwani.
Rikky Dua, a corporate tax consultant categorically calls the removal of indexation benefits as preposterous. According to him, while the affordable housing was already under a lot of stress, now the investors won’t find even luxury housing investment lucrative. It is like killing a golden goose, not necessarily for greed but for sheer lack of application of mind.
“In my honest opinion, the removal of indexation with LTCG, added with the lower excise duty on gold, will encourage an average Indian to go for investment with gold. Now the problem is that gold, howsoever lucrative that may be otherwise, is a dead investment. At least investment with real estate and stock market brings liquidity in the market and revitalises the economic cycle,” says Dua.
Social media is therefore abuzz with questioning the rationale of one size fits all solution of 12.5% LTCG without indexation. D Muthukrishnan, a certified financial planner calls it a disastrous budget on X. According to him, what is relevant for investors: Long term capital gains for all asset classes is going to be 12.5%. You may worry about your stocks and equity funds. Actually that is very less of your concern. You pay 2.5% more than earlier now. What is important is same rate is going to be applicable for all the asset classes including gold and real estate.
“In real estate, you’ve been paying a tax of 20% with indexation. That’s why you were paying less tax. Now the rate is going to be 12.5%. Is it not time to celebrate? No. Because indexation benefits have been removed for all the asset classes including real estate. You were able to adjust your purchase price to inflation and then pay tax. Now that is not possible. The tax outflows on sale of real estate would be henceforth huge, very huge,” writes Muthukrishnan.
Thus, it is pretty evident that the LTCG reduction without indexation is actually a dampener for investment instruments, like stock market and real estate. While the stock market has a different kind of investors, often making returns in the range of 14-20%, may bear the jolt, real estate investors with a national average return of 7-8% have a real reason to worry.
As far as budget constraint middle class home buyers, for whom real estate is the only social security in most of the cases, removal of indexation benefits means a house purchase is always a loss making proposition moving forward.
Unfortunately, within the leading voices of the business of Indian real estate there is defening silence on the issue. But financial analysts are not silent and pretty clear that a LTCG of 12.5% without indexation benefits means a house purchase is a liability now and definitely not an asset.
Ravi Sinha
Twitter: RaviTrack2Media
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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