LTCG without indexation How beneficial?

Ravi Sinha

Ever since the Union Budget 2024-25 announced the Long Term Capital Gain Tax (LTCG) to be lowered from the existing 20% to 12.5% and removed the indexation benefits with it, there has been a nationwide cost and benefit analysis of the same. Everyone — those who have already purchased a house or who intend to purchase — is calculating the profit and loss vis-à-vis the old and new taxation method.

Though the Finance Minister had to partially rollback indexation, and now it is with prospective effect and not retrospective effect (with July 23, 2024 as the cut off date), the property buyers' mood, however, is as pessimistic as that of the investors of real estate stocks.

No other budgetary announcement in the recent past has elicited as much debate within the ‘built’ environment of Indian real estate as that of the LTCG without taxation.

Difference in opinion

While a practical calculation with empirical evidence shows that the lower-taxed LTCG without indexation benefits would put additional burden, there is a school of thought that suggests taxes could be actually lower with the new computation method.

A section of economists and chartered accountants even maintain that indexation benefit has been as per the law of natural justice. If the inflation was 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.

As a matter of fact, social media was on fire immediately after the Union Budget was presented when a certified financial planner, D Muthukrishnan, called 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 per cent. You may worry about your stocks and equity funds. Actually, that is the least of your concern. You pay 2.5 per cent more than earlier now. What is important is that the 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 per cent with indexation. That’s why you were paying less tax. Now the rate is going to be 12.5 per cent. 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.

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 and has no option but to sell it at lower than the market price.

Can you imagine the losses an average common man will have to suffer in this case.

“There is also the issue of circle rate anomaly and in many places the circle rate 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 unfair? Won’t it further encourage more cash transactions in many cases,” questions Panjwani.

Benefits or an eyewash?

Those who find lower LTCG without Indexation beneficial have their own theory, albeit based on a few assumptions:

Assumption I: It is beneficial if property prices continue to appreciate in double digit?

Assumption II: It doesn’t affect end user buyers when they sell a small house to buy a bigger one. It will keep speculator investors out of the property market and hence stabilise property prices.

Assumption III: If the property prices appreciate three or four times in the long run.

All of these are hypothetical assumptions based on conjectures. As per the first assumption, empirical evidence and data points suggest that property prices normally appreciate in the range of 6-7.5 per cent CAGR. A CRISIL report says that the property prices in India have had a CAGR growth rate of just 6 per cent over the past 20 years. So, any calculation on the basis of 10-12 per cent appreciation is preposterous and unrealistic.

City-wise some pockets have shown greater growth, but that is an aberration. Post-Covid growth of property in the range of 10-12 per cent has been due to stagnant market of pre-Covid days and hence a pent-up demand. This can’t be generalised.

Second assumption is also faulty, since not everyone in this country sells a house to upgrade. There are many others who for their own personal reasons, whether financial hardship or retirement stage, sell the house to buy a smaller one at lower cost. LTCG without indexation is going to hurt these people who have taken a conscious decision to downsize.

Then the assumption of 300-400% appreciation over 25-30 years doesn’t factor in depreciation cost of the property. In most of the cities the notional value of three to four times appreciation is not what the market is going to offer for an old dilapidated building, especially when that notional market value is based on the new supply in the given market.

There is another downside that the economists are pointing out. The Union Budget has treated stock and real estate on an equal level. However, the fact is that the investor profile, risk-taking appetite and economic condition of a home buyer and the stock investor is never the same.

Moreover, another reality to look into is that when you buy a property, you pay Stamp Duty that is about 5-7% but Security Transaction Tax (STT) on stocks is just 0.1%.

In nutshell, inflation-adjusted indexation is the best way to calculate the LTCG, and not the actual absolute capital gain having no correlation with the actual value of money.

Cost and benefit analysis 

• If we take a liberal view then property value, at best, doubles in 10 years, with an average growth of 7.2% CAGR. So, a property of ~1 crore will be worth ~2 crore in the next 10 years.
• Let’s calculate LTCG with Indexation, as per Cost Inflation Index Table.

In April 2014 Cost Inflation Index was 240 which was 363 in April 2024.

So, inflation indexed value of ~1 crore property is:

1 crore X 363 divided by 240 = 1,51,25,000 and gain is ~48,75,000. 20% LTCG is ~ 9,75,000.

• Now without Indexation with ~1 crore LTCG at 12.5%, the same amount is ~12,50,000.

This calculation is based on absolute numbers only, and if someone has borrowed a home loan at 8-9% interest, then property appreciation is the actual depreciation of your hard-earned money.

The writer is CEO Track2Media Research Pvt Ltd