The removal of indexation benefits from the sale of real estate property has hit those who have old property hard. Finance Minister Nirmala Sitharaman has raised the impact of taxes on the capital gains made by sale of property significantly at one stroke by removing the indexation benefit.
This will erode the benefit of the finance minister bringing down the LTCG rate on property from the earlier rate of 20% (with indexation benefit) to 12.5% since the indexation benefit has been eliminated.
Let’s see how.
How did indexation work?
Indexation is a method to factor in the impact of inflation between the time the property was purchased and the time when it was being sold. It is adjusted for cost inflation index or CII.
Under the old rules is the cost of an apartment was Rs 50 lakh several years ago and if is sold for Rs 70 lakh, the capital gain was computed to be Rs 5.18 lakh and not Rs 20 lakh.
The reason: the effective purchase price of the property was computed to be Rs 64.82 lakh and not Rs 50 lakh.
Therefore, the LTCG impact according to the old rule, was Rs 1,03,600.
LTCG under the new rule
However, the new rule would not allow any such CII adjustment of the historic price of purchase and thus the tax incidence would be on the full nominal difference ie, Rs 20 lakh.
The new tax liability at 12.5% would require an LTCG payment of Rs 2,50,000.
Sellers of old properties pay more
While appreciating the overall Budget provisions for the real estate industry, Niranjan Hiranandani, the MD of Hiranandani Group told the media, “… for historical properties, which are coming into the market, they will have to pay much more for it, because indexation is sought to be withdrawn.”
While replying to media queries on the Budget proposal, finance secretary T V Somanathan said 12.5% without indexation benefit is “higher” than 20% with indexation.
“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,” Deloitte India Partner Aarti Raote told PTI.
Those who have old properties to sale will have to shell out a lot more tax if they make a profit. The reason: the finance minister has removed indexation benefits available earlier. Biz News Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
