Why was indexation benefit removed for real estate? DEA secretary Explains

The removal of indexation benefits for long-term capital gains on real estate, announced in the Union Budget 2024, has sparked intense debate. Finance Minister Nirmala Sitharaman’s decision to eliminate this provision, effective July 23, 2024, is expected to significantly impact the real estate market.

At the India Today-Business Today Budget Round Table 2024, Ajay Seth, Secretary, DEA, was questioned about the rationale behind this move, particularly given that revenue generation was not the stated objective.

Seth said, "Historically, our taxation policy was instrumental in steering investments towards specific asset classes. For instance, tax incentives were offered to promote small savings schemes and listed securities over unlisted ones. However, we've moved beyond this approach. The Finance Minister has outlined a vision in the Direct Tax Code for a more equitable taxation system that treats all asset classes and investors equally."

"The only differentiation will be between short-term and long-term investments, as the latter is generally considered more beneficial for the economy. The government has eliminated preferential tax treatment for debt instruments, allowing investors to make informed decisions based solely on their risk-return preferences across various asset classes, including equity, gold, and real estate. The question of indexation, specifically, is not a policy matter; it's about accurately reflecting inflation's impact on investment returns. Ultimately, investors are best positioned to assess their risk tolerance and potential returns," added Seth.

Many experts view the reduction of long-term capital gains tax to 12.5% as a positive step, despite the elimination of indexation benefits. This move is expected to increase liquidity in the real estate market. Additionally, aligning long-term capital gains tax rates across different asset classes has been a long-standing investor demand. The government's focus on digitisation, efficient land management, and updated regulations is also seen as a catalyst for urbanisation and real estate development, simplifying property transactions and boosting municipal revenues through increased property taxes.