The real estate sector has voiced strong apprehension regarding a proposal to eliminate indexation benefits for long-term capital gains, arguing that doing so will significantly hinder the industry’s growth trajectory. Property owners, especially those who have retained their assets for over ten years, are expected to feel the brunt of this change, facing potential tax increases that arise from the inability to adjust their asset’s cost basis for inflation due to the lack of indexation.
Niranjan Hiranandani, the Chairman of NAREDCO, expressed concerns, stating, "The change may result in higher taxes for individuals who wish to sell assets held for more than ten years.” In the forthcoming budget for 2024-2025, professionals are looking at a proposed flat tax rate of 12.5% on capital gains derived from property sales, stripped of any indexation benefits.
Despite these concerns, the Income Tax Department took to social media on Wednesday, disagreeing with Hiranandani's claims, asserting their belief that real estate returns usually oscillate between 12% and 16% annually, significantly outpacing inflation rates that hover around 4% to 5%.
Industry leaders believe that, under this new taxation regime, capital appreciation from a booming economy and a simpler tax framework may yield better results. However, experts in real estate contend that the assertion that real estate returns often exceed inflation is misleading when taken contextually.
The elimination of indexation benefits could deter sellers in the secondary market, as heightened capital gains taxes may overshadow the benefits of a reduced long-term capital gains tax. This change is expected to have no significant impact on first-time homebuyers. Ritesh Mehta, Senior Director/Head, North, East & West, Residential Service, India JLL, commented, "The consistent growth of Reddy Reckoner rates across cities ensures no increase in unaccounted money in real estate transactions."
New investors who plan to retain properties for over two years might still attract advantages from a lower long-term capital gains tax, which could subsequently invigorate interest in short-term investments. The income tax department also highlighted the merits of streamlined tax computations, enhanced filing systems, and simplified record-keeping procedures afforded by this new proposal, which also seeks to unify the various tax rates applied across asset classes.