Union Budget 2024: The Ripple Effects of Removing Indexation on LTCG Tax

In the Union Budget 2024, Finance Minister Nirmala Sitharaman introduced significant changes to the Long Term Capital Gains (LTCG) tax regime on property sales. While the LTCG tax rate was reduced from 20% to 12.5%, the removal of indexation benefits has sparked considerable debate and concern.

The opposition has been vocal about the potential negative impacts of this policy. In a thread posted on X (formerly Twitter), the Indian National Congress (INC) Kerala chapter highlighted how the removal of indexation will significantly impact property investors. They illustrated scenarios showing the increased tax burden and net losses that could arise from the new tax regime, calling it a move that penalizes the middle class and benefits the government at the taxpayers’ expense.

LTCG to Loot Middle Class | How will removing indexation in calculating LTCG tax affect everyone?

Today, FM @nsitharaman reduced Long Term Capital Gains (LTCG) Tax on properties to 12.5%, but cleverly removed indexation, which adjusts the property price at the time of sale, to… pic.twitter.com/6uaYjtIaDP

— Congress Kerala (@INCKerala) July 23, 2024

What is Indexation?

Indexation is a method used to adjust the purchase price of an asset to account for inflation over the period it was held. This adjustment, facilitated by the Cost Inflation Index (CII), helps in calculating the actual capital gain by considering the erosion of purchasing power over time. Without indexation, the entire nominal increase in the asset’s value is considered a gain, leading to higher tax liabilities.

The New Tax Regime: A Closer Look

Let’s break down the changes with a couple of examples to illustrate the impact of removing indexation.

Scenario 1: Long-Term Holding

Suppose you purchased an apartment in January 2009 for ₹50 lakhs and sold it in January 2024 for ₹1.5 crore. Under the previous regime, indexation would adjust the original purchase price to reflect its value in today’s terms. According to the CII, ₹50 lakhs in 2009 is approximately ₹1.32 crore in 2024. Thus, your capital gain would be ₹1.5 crore – ₹1.32 crore = ₹18 lakhs. At the old tax rate of 20%, your tax liability would be ₹3.6 lakhs.

Under the new regime, without indexation, your capital gain is ₹1.5 crore – ₹50 lakhs = ₹1 crore. At the new tax rate of 12.5%, your tax liability becomes ₹12.5 lakhs. This change results in an additional tax burden of ₹8.9 lakhs compared to the indexed method.

Scenario 2: Shorter Holding Period

Consider a scenario where you bought an apartment in January 2018 for ₹80 lakhs and sold it in January 2024 for ₹95 lakhs. With indexation, the adjusted purchase price would be around ₹95 lakhs, resulting in no real gain and, consequently, no tax liability.

However, under the new regime, without indexation, your capital gain is ₹95 lakhs – ₹80 lakhs = ₹15 lakhs. At 12.5%, the tax would be ₹1.875 lakhs. This scenario highlights how the new regime can lead to significant tax payments even when the real value gain is negligible or negative.

Broader Implications

Middle Class and Real Estate Investors

The removal of indexation disproportionately affects the middle class, who often rely on real estate as a key investment. The increased tax burden reduces the net returns on long-term property investments, making real estate less attractive compared to other asset classes.

Real Estate Market

The real estate sector, already grappling with various challenges, may face further strain as investors seek alternative avenues with better post-tax returns. This could lead to reduced demand for properties, potentially slowing down the construction and development activities, and impacting the overall growth of the sector.

Black Money Concerns

One of the unintended consequences of this policy shift might be an increase in the use of black money. To mitigate the higher tax liabilities, sellers might resort to undervaluing transactions, thereby evading taxes and perpetuating the cycle of black money in the economy

Also read: How Does the Union Budget 2024-25 Impact You?

The Union Budget 2024’s removal of indexation for calculating LTCG tax on property sales has far-reaching implications. While the reduction in the tax rate to 12.5% may seem beneficial on the surface, the absence of indexation significantly increases the tax burden on genuine long-term gains. This policy change, though aimed at simplifying the tax regime, may ultimately deter property investments and affect the real estate market’s stability.

As the government seeks to balance fiscal objectives with the interests of taxpayers, it is crucial to consider the broader economic impacts and potential adjustments to mitigate the adverse effects on the middle class and the real estate sector.