Reduction of LTCG is much better than removal of indexation benefits: Hari Babu, of NAREDCO

Lowering the long-term capital gains (LTCG) tax is better than removing indexation benefits. Even after eliminating indexation, a 12.5% tax rate provides a much better benefit, said a real estate expert.

"Suppose you want to purchase property now and sell it after exactly 25 months. What is the indexation available for you? Very minimal. But if they reduce the tax rate by 12.5%, and you calculate the indexation  for two years, it is nothing. So the reduction of tax by 12.5% is much bigger. You have to see both of these scenarios. Somebody selling a 20-year-old property and somebody selling a two-year-old property. But two years is definitely a much bigger advantage than 20 years in property selling," said G Hari Babu, National President of NAREDCO.

We will see investments moving from digital money towards real money, said Babu.

In a significant move to streamline the real estate sector, Finance Minister Nirmala Sitharaman announced pivotal changes in the Union Budget today that are expected to have far-reaching impacts. The first major announcement concerns the removal of indexation benefits for the sale of property. Until now, property sellers could adjust the purchase price of their assets for inflation, reducing the amount of taxable capital gains. The elimination of this benefit aims to simplify the tax structure.

Simultaneously, the Finance Minister has proposed a substantial reduction in the rate of long-term capital gains (LTCG) tax on property sales, bringing it down to 12.5%  from the existing 20% . This reduction is poised to make property investments more lucrative and accessible, potentially boosting the real estate market.

"The FM has removed the indexation and reduced the tax from 20% to 12.5%. Previously, considering 20% plus a 15% surcharge plus a 4% cess, the net rate worked out to 27%. Now, with 12.5% plus 15% surcharge, plus 4% cess, the rate works out to 15%. So, the reduction from 27% to 15% is much better than removing the indexation. I personally prefer no indexation as I did not want to go to a chartered accountant," said Babu.

There are, however, arguments that the loss of indexation benefits may disproportionately affect long-term property investors who have held onto their assets for a significant period. On the other hand, the contrasting approach—eliminating indexation benefits while reducing LTCG tax rates—aims to strike a balance between increasing tax revenue and fostering a more investment-friendly environment.

The finance minister has also simplified how assets will be classified as long-term and short-term. "There are three components to this simplification. Firstly, it is proposed that there will only be two holding periods, 12 months and 24 months, for determining whether the capital gains are short-term or long-term. For all listed securities, the holding period is proposed to be 12 months, and for all other assets, it shall be 24 months," as per the Budget documents. Real estate will continue to have a holding period of 2 years.