No indexation? LTCG tax could go up 290% on properties bought after 2010

Longer holding periods correlate with higher taxes with or without indexation. Without indexation, the taxes are comparatively higher

 An analysis by Bankbazaar has revealed a significant increase in long-term capital gains (LTCG) tax liabilities for property owners across India following the removal of indexation benefits in the Union Budget 2024.

Indexation is a method used to adjust the purchase price of an asset, like property, to account for inflation over time. This adjustment helps to reduce the taxable capital gains when the property is sold.

How it works:

• The government publishes a Cost Inflation Index (CII) annually.
• When you sell a property, the original purchase price is adjusted upwards using the CII to account for inflation.
• This adjusted purchase price is then used to calculate the capital gains, potentially reducing the taxable amount.

Impact of Removal:

 

• The removal of indexation means that the original purchase price of the property will be used to calculate capital gains, without any adjustment for inflation. This will typically result in a higher taxable profit and, consequently, a higher tax liability.

Finance minister Nirmala Sitharaman announced a standard long-term capital gains (LTCG) tax during her Budget speech. Earlier, different LTCG rates were applied to various financial and non-financial assets. For example, selling an equity investment held for over a year attracted a 10 per cent LTCG tax, while non-financial assets such as real estate and gold were taxed at 20 per cent.

Now, a flat LTCG tax of 12.5 per cent has been introduced. This has been done to "simplify taxation", according to Sitharaman. The government has also clarified that indexation benefits for properties bought till 2001 will continue. This means the price of properties that were bought before 2001 will be taxed after factoring in indexation based on the price in 2001 or price at which it was bought plus indexation till 2001 whichever is lower.

Value Research explains with an example: Imagine you bought a property for Rs 50 lakh in 2014-15 and sold it for Rs 1 crore before yesterday's budget. You'd have been able to adjust the cost price of the property with inflation (known as indexation), which means the cost price would have been marked up to around Rs 75.6 lakh on the basis of cost inflation index. The gain of around Rs 24.4 lakh would then be taxed at 20 per cent, resulting in a tax of approximately Rs 4.87 lakh.

Now, without indexation, the property's cost price remains Rs 50 lakh when selling the property for Rs 1 crore. This means you'll pay a 12.5 per cent tax on the Rs 50 lakh gain, amounting to Rs 6.25 lakh.

"For instance, let us suppose, Mr A had acquired a house property before 2001 at the cost of Rs 100 and now in 2024, he intends to sell this property for Rs 400.  Then basis the earlier provisions, Mr. A’s payable LTCG taxed @20% would have been taxable at the differential cost between the sale price and the indexed cost (363, CII 3.63x100 for FY 2024-25). Thus, his computation for LTCG would have been (400-363) taxed @ 20%  meaning Rs 37 taxed @ 20%, leading his payable LTCG to Rs 7.5 only. Whereas, after the proposed amendment LTCG tax will come @ 12.5% of [400-100] making his payable LTCG equivalent to Rs 37.5. Thus, LTCG tax outflow will increase by around 80% in such cases," said Keshav Singhania, Private Client Leader, Singhania & Co.

This change will have a profound impact on the real estate sector, as sellers will no longer be able to adjust the acquisition cost using the Cost Inflation Index (CII). Earlier, due to the indexation benefit, a seller selling a property would only pay taxes on the difference between the sale value and the indexed cost of acquisition. Therefore, even with higher rate of taxation, the seller would pay taxes only on the difference. 

Now, even with a reduced rate of taxation of 12.5%, the seller would be liable to pay higher taxes due to the removal of indexation benefit that enabled the seller to inflate the acquisition cost to its present value as per the Cost Inflation Index (CII). 

This amendment will take effect retrospectively from 23rd July 2024 and is bound to have far-reaching consequences. 

A study by Bankbazaar compared the tax implications of property sales with and without indexation, considering different holding periods and property values. The findings are stark:

Substantial Tax Increases: The average LTCG tax without indexation has jumped by a staggering 290% compared to the tax levied with indexation.

Longer Holding Periods, Higher Taxes: Properties held for longer periods witnessed even more significant tax hikes, with some cases showing a 500% increase in tax liability.

Regional Disparities: While the impact is widespread, cities like Mumbai and Kolkata have been particularly hard hit, with taxpayers facing exceptionally high tax burdens.

The removal of indexation, coupled with the introduction of a flat 12.5% LTCG tax rate, has effectively eroded the benefits of long-term property ownership. This change is expected to dampen investment sentiments in the real estate sector and potentially discourage long-term holding of properties.

• The average indexed tax on LTCG in these 13 years is 3.90.

• This average non-indexed tax rises 2.90 times to 11.34, implying additional taxes of 7.44.

• Similarly, the median tax rises 12.10 times from 0.83 to 10.05.

• The actual simulated taxes for all periods will be larger post the updated HPI values for Q2-2024-25 and Q3-2024-25.

• Short-term holdings: All taxes with indexation were 0.00 from 2016-17. Without indexation, the taxes rise significantly with values of 3.02 to 8.70.

CITY-LEVEL FINDINGS

• Mumbai has the highest average additional tax at 7.02.

• Kolkata is next at 6.71. The city sees a 500x jump in applicable taxes for properties purchased in 2014-15, and 106x increase for properties purchased in 2017-18 – the two highest such values in the study.

• Delhi and  Jaipur, with largely 0.00 tax with indexation, now have higher taxes with the new rules.

ALL-INDIA LTCG

Due to indexation, there’s no LTCG from 2016-17. These seven years reflect long-term capital losses. Therefore, despite the 20% tax rate, the investor’s tax liability would be zero in these years. However, without indexation, there are huge leaps in the LTCG for all years including from 2016-17

ALL-INDIA LTCG TAX

"There’s a severe loss of tax savings especially in the years from 2016-17. From the zero tax liability, We see significant liabilities arising for these years. The longer the holding periods, the larger the tax liabilities are," said AR Hemant, AVP, BankBazaar.com.