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A day after the Union Budget removed indexation benefits for sale of properties, the real estate sector is still reeling from the move.
Meanwhile, the Income Tax Department on Wednesday tried to clear the confusion through a series of tweets and said that the move will benefit a large number of taxpayers who want to sell properties. But real estate industry players have a different opinion on the matter. According to industry players, the government has reduced LTCG tax but removed indexation against it. So there is no benefit. The government needs to maintain indexation. How can you ignore inflation? Alternatively, this rate should be reduced to five per cent.
The income tax department said that the finance minister's move to reduce the long-term capital gains (LTCG) tax rate from 20 per cent to 12.5 per cent without indexation for real estate will benefit almost all cases. Indexation means adjusting the purchase price of a property for inflation. So that the profit and tax liability are reduced. Generally, the nominal return of real estate is in the range of 12 per cent to 16 per cent per annum. This rate is much higher than inflation. Indexation for inflation is in the range of four per cent to five per cent depending on the holding period. Therefore, substantial tax savings are expected from most such taxpayers, the income tax department said. Industry players have different opinions on this matter.
Regarding the removal of indexation benefit, industry insiders said that despite the reduction in LTCG tax rate, the removal of indexation benefit for sale of properties is likely to discourage sellers in the secondary market due to higher taxable capital gains. However, this trend will not last long and first-time homebuyers will remain unaffected. The consistent increase in ready reckoner rates across cities ensures that there is no increase in unaccounted money in real estate transactions.
What is indexation?
Indexation means adjusting the purchase price of an asset for inflation, adjusting a price, salary or other value based on changes in some other price or composite indicator of prices, Indexation is to incorporate the effects of inflation, cost of living or input prices.
Real estate matters
LTCG tax rate for real estate players is now 12.5 per cent without indexation
According to the IT department, the nominal returns of real estate range between 12 per cent and 16 per cent per annum.
Real estate players believe that the removal of indexation benefits for sale of assets is likely to discourage sellers in the secondary market due to higher taxable capital gains.
According to experts, if the property is kept for a long time then in some cases the returns are even less than the inflation rate.