Immediately after the Union Budget 023-24, when Track2Realty had taken a principled position that it is going to hurt the Indian home buyers, many critics & self-proclaimed financial experts had questioned us. They were celebrating LTCG without Indexation and now very same set of people are again glorifying the dual option- with or without Indexation for deals before the Union Budget. How could one argue for both and against the motion? It is like batting for both teams in a game of cricket. Isn’t it?
LTCG rollback before the date of Union Budget 2024-25, and giving dual option for properties by the time of budget announcement to calculate it with & without indexation (whichever is lower) only means taxation is not from retrospective effect and is applicable with the prospective effect.
The advocates of government policy say the long-term impact is less with Indexation removal. I wonder whether the given support for economic reason or political reason. May be the social media profile of these proponents of Indexation removal can give some clarity.
My principled position is Indexation as per the law of natural justice. Why am I saying this?
If the inflation is higher in comparison to the property price, the taxpayers were able to claim capital loss and save taxes on other capital gains made in that financial year.
Let’s get into their point of view of those who are hailing Indexation removal before I clarify my point. Their argument and logic is based on a few assumption.
Assumption: I: When your appreciation is in double digit.
Assumption II: When you are selling property to upgrade & buy a bigger house.
Assumption III: When property prices have appreciated 300% or 400%.
A lot of ‘what if’ is involved in this assumption. It’s like my if my donkey turns into a horse, I will win all the race.
I also have my strong objections with the way stock & real estate is being treated in the same manner. The investor profile and entry & exit load of the two gifen financial assets is different. In real estate, you pay Stamp Duty at 5-7% but Security Transaction Tax (STT) on stocks is only0.1%.
Then not every Indian is selling is house to upgrade, and hence re-invest. There are chances of distress sale, say a medical emergency, in a country where a house is more often than not the only social security. There could be a retiree who doesn’t have any other corpus, and hence prefers to sell the bigger house and downgrade to a lesser value house.
Let’s do a reality check with the market data and demolish all the given assumptions above. This is necessary because the given assumptions have not factored the ground reality of market. Average house price growth in India has been 6% in the last 20 years, as per CRISIL report. Of course, it varies city-wise and there are some pockets that have shown greater growth.
But the advocates of Indexation removal are wrongly taking post Covid property appreciation of 10-12% as their benchmark. That growth was due to stagnant market of past and hence pent up demand. This can’t be generalized. As a matter of fact, in certain localities of Mumbai and NCR the appreciation over a period of 10-15 years long time has been meagre 3-4%. What about those who sell houses over there?
If we take a liberal view then property at best doubles in 10 years, with an average growth of 7.2% CAGR. Why this benchmark? It is because most of the home buyers in India’s Top 10 cities mostly assume that the property prices double in every 10 years.
So, a property of INR 1 crore will be 2 crore in the next 10 years. Cost inflation index table comes into play here. Let’s calculate LTCG with Indexation. Now in April 2014 Cost Inflation Index was 240. In April 2024Cost Inflation Index is 363. So, 1 crore property indexation 1 crore multiplied by 363 and divided by 240. The indexation adjusted amount here is INR 1,51,25,000 and hence gain is INR 48,75,000. With 20% LTCG along with the Indexation, taxable amount is INR 9,75,000. But without Indexation at 12.5%, same amount is INR 12,50,000.
Now for the advocates of really long period of time, if we go 10 years further in the past 2004. So, same INR 1 crore property purchased in 2004 with 7.2% CAGR is now INR 4 crore. Sounds a solid gain here but in 2004 Cost Inflation Index was 113. So, with Indexation value of INR 1 crore stands today at 1 crore multiplied by 363 and divided by 113 is equal to INR 3,21,23,893. Capital Gain calculation is INR 4 crore minus 3,21,23,893, that is equal to INR 78,76,107. With Indexation tax at 20% is INR 15,75,221. Without Indexation tax at 12.5% over INR 3 crore gain is INR 37,50,000.
A loss loss proposition Right? And never forget, we are mostly talking about the high-rise apartment in the cities. Who will buy a 20-year-old building at 4 crore fair market price if the new supply of swanky buildings is selling at that price in the neighbourhood. So, a depreciation factor comes into play.
I am only talking about the absolute numbers here, assuming you go and do a home shopping with your own money. Now, 90-95% Indians buy houses with loan in the range of 8-9%. If I compute that it then the losses are even greater.
So, LTCG without Indexation benefits is going to penalize the home buyers and not incentivize them.
Ravi Sinha
#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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