Recently, the Union Finance Minister in the Union Budget 2024 has announced the reduction of the tax on long-term capital gains (LTCG) arising on the sale of immovable property from 20% to 12.5% and at the same time the government had withdrawn the the indexation benefit available to taxpayers while determining the cost of acquisition.
Internationally, the investors are motivated by giving incentives so as to encourage more investment in the real estate. However, after the Union Budget 2024 the Modi-government has planned to disincentive the investor class by withdrawing indexation and withdrawing of indexation is not like imposing tax but penalising the investor class.
Inflation ravages the value for money that is why the cost of acquisition is indexed while calculating the capital gains tax.
Illustration
Here is the illustration of both the scenarios with Indexation and without indexation:
Let’s assume ‘A’ has bought a Plot for Rs. 1,00,00,000 in April 2001 and sold it in July 2024 for Rs. 4,17,00,000.
LTCG Tax Payable With Indexation
As ‘A’ has held the plot for more than 1 year, LTCG tax will be leviable. ‘A’ can claim the benefit of indexation to adjust the purchase price for inflation. Assuming the inflation adjusted index purchase price is not Rs. 1 Crore but it is Rs. 3.60 Crores. The taxable LTCG will be Rs. 57,00,000 (Rs.4,17,00,000-Rs.3,60,00,000), and the tax on LTCG will be Rs. 11,40,000 (20% of Rs.57,00,000).
LTCG Tax Payable Without Indexation
As ‘A’ has held the plot for more than 1 year, LTCG tax will be leviable. The cost of the Plot at the time of acquisition was Rs. 1,00,00,000 and it was sold at Rs. 4,17,00,000, the profit earned by ‘A’ was Rs. 3,17,00,000 (Rs. 3,17,00,000-Rs.1,00,00,000). The 20% LTCG tax shall be paid on Rs. 3,17,00,000 (12.5% of Rs. 3,17,00,000) and the tax on LTCG will be Rs. 39,62,500/-.
Conclusion
Now, after withdrawal of the indexation as well as the reduction of the tax on LTCG the ‘A’ will have to pay Rs. 28,22,500/- (Rs. 39,62,500- Rs. 11,40,000) extra on the sale of the plot of Rs. 1 Crore.
Implications Of Withdrawing Indexation
The implications of withdrawing indexation in the long run will cause:
- The investment in real estate will be lowered down and people, especially the middle class will not be able to purchase his dream home.
- The transaction in the real estate will be based on circle rate and no one will disclose the actual rate of the property.
- The real estate sector will be bombarded with the black money.
