The government on Tuesday proposed reducing the long-term capital gains tax on immovable properties to 12.5 per cent from 20 per cent, but removed the indexation benefits to adjust for inflation, a move experts termed as "negative" for sellers.
As per the Memorandum to the Union Budget, with rationalisation of rate to 12.5 per cent, indexation available under section 48 of the Income Tax Act is proposed to be removed for calculation of any long-term capital gains, which is presently available for property, gold and other unlisted assets.
"This will ease computation of capital gains for the taxpayer and the tax administration," it said.
Replying to media queries on the budget proposal, Finance Secretary T V Somanathan said 12.5 per cent without indexation benefit is "higher" than 20 per cent with indexation.
"In 95 per cent cases, this 12.5 per cent will benefit. Due to this change, middle class will benefit," he said.
The secretary also said indexation benefit would be applicable on properties bought before 2001.
Commenting on the proposal, Aarti Raote, Partner, Deloitte India, said the taxability of long-term capital gains without indexation will have significant impact on taxpayers.
"The indexation benefit was provided to increase the cost of the asset to the current value and the gain is then computed against the sale consideration. However, now the taxpayers will pay tax on the difference between the actual cost and the sale consideration which will be significant," she said.
According to her, investor will end up losing money if the adjustment for inflation is not considered.
Anupama Reddy, Vice President and Co-Group Head (Corporate Ratings), ICRA, too said that considering the long-term returns on the residential real estate sector, despite a reduction in the long-term capital gains tax rate, the removal of indexation benefit at the time of sale of property is likely result in a higher tax outgo.
"Hence, this is a negative for the sector," Reddy added.
Aniket Dani, Director- Research, CRISIL Market Intelligence and Analytics, said the reduction in long-term capital gains tax on real estate property from 20 per cent to 12.5 per cent is a positive.
"However, the removal of the indexation benefit is largely negative for all those planning to sell their old properties," Dani said.
Samir Jasuja, founder and CEO of PropEquity, too was of the opinion that removal of indexation benefit on sale of property can hinder the growth of real estate sector and slow down the vision of achieving USD one trillion real estate economy.
Vivek Jalan, Partner, multi disciplinary firm Tax Connect, said long-term capital gain taxation for real estate had a great benefit of inflation adjusted indexation wherein in case one would sell a long-term capital asset, say property, then the LTCG would be 20 per cent after taking the benefit of indexed cost of acquisition and improvement.
"Now indexation has been (proposed to be) removed...This will severely impact property sellers and consequently the real estate industry, which is a big employment generator in the economy," he said.
Jalan further said the resale of properties would be severely impacted and it may give rise to cash economy where sellers may try to further suppress their sale value.
Former president of realtors body CREDAI Jaxay Shah said the impact of the proposed changes would be neutral if one assumes average return on property to be 12 per cent for a period of more than 4 years and inflation at 5 per cent.
On the other hand, if the average return on investment is more than 12 per cent and inflation rate is 5 per cent then there is a tax saving as per the proposed amendment compared to the present tax rate.
