UNTIL THE BUDGET last week, long-term capital gains (LTCG) calculation for real estate was based on indexation. Consider a home bought by the Rastogis in 2009-10 for `50 lakh and sold five years later for Rs 77 lakh at 9% CAGR.
With the Cost Inflation Index (CII) appreciating by 6% each year, the indexed cost of acquisition was Rs 67 lakh and the difference of Rs 10 lakh the LTCG. At 20% tax, the Rastogis would pay Rs 2 lakh in tax — 2.6% of the sale price. The capital gain tax was paid only if home price appreciation was above inflation.
That was, until now. Budget 2024 has cut the LTCG tax rate from 20% to 12.5%; but has removed the indexation benefits for homes. Now, inflation does not matter. Home prices may have fallen in real terms but will still attract capital gain tax.
7th Pay Commission Update: Govt breaks silence on OPS restoration, scrapping of NPS | Here’s all central govt employees need to know
Pune’s housing market poised for a paradigm shift in 2025
Senior Citizen Fixed Deposits offering highest interest rates in July – Compare the rates
Realty players grapple with indexation move
Back to the Rastogis
After this Budget, the difference of `27 lakh will be taxed at 12.5%. The tax payable is `3.4 lakh, i.e. 4.4% of the sale price. Let’s call this ~ 2 percentage points hike as “tax premium” induced by new tax regime.
Unlike a uniform CII, however, India is a land of diversity. Besides, the real estate markets change their characters every few years. From the volatile 2010s to the relatively stable 2020s, home price trends in India seem to be maturing.
Considering 2009-10 as the base year for the RBI Home Price Index (HPI), the CAGR has moderated to around 9% from the mostly double-digit figures earlier. The smoothening of HPI is common across all major metropolitans and the acceleration in the prices has been negative in the recent decade.
Tax premiums
There are a few theoretical scenarios when the new capital gains tax turns favourable. If home prices consistently grow at 8-10% while inflation remains tame (i.e. below 4%), then in a few cases the new tax regime may mean less in capital gains tax (i.e. 1-3% tax discount).
However, these cases are rare. In fact, the CAGR in CII has been consistently above 6% during the period. At this indexation rate (or above), HPI appreciation must exceed 15% to render the new tax regime favourable to homeowners. By the way, in most cases, the tax premiums only increase with an increase in the holding period.
Most homebuyers, now, will pay substantially more in taxes when selling a home, and the tax premiums worsen with increase in the holding period. This will discourage new buyers from buying homes as an investment. Existing investors will hurry to capture the capital gains, as long holding periods imply higher tax premiums.
The net effect is yet to be seen. Nevertheless, new investor-buyers should be more cautious. If the net demand is adversely affected, it means further disciplining of home prices. Nevertheless, the Budget’s focus on rental and affordable housing appear to be aligned with the new capital gains tax laws.
The writer is chair & associate professor, Finance & Accounting, IIM Ahmedabad
Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.
Comments are closed, but trackbacks and pingbacks are open.