The Controversial Move to Remove Indexation
The 2024 budget introduced a significant change that has stirred much debate in the real estate market— the removal of indexation benefits for long-term capital gains (LTCG) on real estate. Indexation has long been a tool that helped property owners reduce their tax liabilities by adjusting the purchase price of their assets for inflation. The elimination of this benefit has raised concerns across the industry. But who really gains from this move? The answer, it seems, is no one.
What Is Indexation and Why Was It Important?
Understanding Indexation
Indexation allows property owners to adjust the purchase price of their property based on inflation, effectively lowering the capital gains tax they would need to pay when selling the asset. This benefit was crucial for maintaining the real value of investments over time.
Impact of Indexation on Taxation
Without indexation, property sellers are required to pay tax on the full difference between the purchase price and the sale price, without any adjustment for inflation. This can result in significantly higher tax liabilities, particularly in a country like India where inflation rates can be substantial.
The Consequences of Removing Indexation
Higher Tax Liabilities for Sellers
The most immediate impact of removing indexation is that property sellers will face much higher tax bills. For many, this could mean a substantial portion of their profits from selling a property will go towards paying taxes, diminishing the financial benefit of investing in real estate.
Reduced Investor Confidence
Real estate has traditionally been a favored investment due to its potential for long-term appreciation and the tax benefits associated with it. With the removal of indexation, the appeal of real estate as an investment vehicle may decline, leading to reduced investor confidence and lower investment in the sector.
Why Removing Indexation Benefits No One
No Benefit to the Government
While the government may see a short-term increase in tax revenue, the long-term effects could be detrimental. Reduced real estate transactions and investments could lead to a slowdown in the sector, ultimately affecting related industries and employment.
Negative Impact on the Real Estate Market
The real estate market is likely to suffer as potential sellers may choose to hold onto their properties rather than face high tax liabilities. This could lead to a reduction in the supply of properties for sale, driving up prices and making housing less affordable for buyers.
The Burden on Homeowners
For homeowners who have held onto their properties for many years, the removal of indexation is particularly harsh. These individuals may see a large portion of their retirement savings or financial security eroded by high taxes on the sale of their homes.
A Policy That Benefits No One
The removal of indexation for real estate is a policy change that appears to benefit no one—neither the government, the real estate market, nor homeowners. As the effects of this policy begin to unfold, it may become evident that the decision to remove indexation was a misstep that could have far-reaching consequences for the Indian real estate market and economy. Policymakers may need to reconsider this change to ensure that real estate remains a viable and attractive investment option for all.
