"Bidding bye to Indexation Benefit will surely welcome Tax Burden", says Real Estate Investors

In Budget 2024, a major change in the real estate sector was announced: indexation benefit on property sales was removed, and the Long Term Capital Gains (LTCG) tax rate reduced from 20% to 12.5%, but now applied without indexation. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it.

Experts anticipate this will raise taxes for property sellers, potentially cooling investor enthusiasm. Yet, they foresee growth opportunities in affordable and mid-level housing, spurred by government initiatives supporting MSMEs and infrastructure.

The government noted that the indexation benefit for properties bought after 2001 will be removed while retaining it for properties bought before 2001. 

Former president of CREDAI, Jaxay Shah explained that, the impact of proposed changes would become neutral if the average property return is 12% over more than four years, with inflation at 5%.

Shah also added, if the return exceeds 12 % with 5% inflation, there could be a tax saving under the new amendment compared to the current rate. From 2024 onwards, the capital gains tax on property acquired after 2001 will be 12.5%, reduced from the previous 20%. Conversely, the long-term capital gains tax on equities has increased to 12.5% from the earlier 10%.

Moving capital out from long-term gains on shares and securities incurs a higher tax impact of 25%, whereas from real estate, it results in a reduced tax impact of 37.5%.

Chairman and Managing Director, Knight Frank India, Shishir Baijal believes that if the property's value has increased more than the inflation rate, the new 12.5% tax rate is expected to be more advantageous for real estate sellers compared to the previous 20% tax rate after adjusting for indexation.

Since indexation adjusts the purchase price for inflation, thereby reducing capital gains tax on property sales the removal of indexation benefits could potentially lower demand from investors.

Regional Director & Head – Research, ANAROCK Group, Prashant Thakur explained, “Real estate developers may respond by offering incentives and focusing on affordable housing to attract buyers in the primary sales market. It may reduce speculative demand and increase supply, leading to some price corrections. In the short term, this could result in a notable price decline as sellers compete for fewer buyers."

He further added that over the time, market stability will return, and prices will align with genuine end-user demand rather than speculation-driven demand. Developers may increasingly focus on affordable and mid-segment housing.

Mitesh Jain, Partner at Economic Laws Practice highlighted that, while the LTCG rate on property has been reduced, the removal of indexation will likely result in higher taxes, particularly affecting lower and middle-income taxpayers.