In July 2024, the Indian government introduced significant changes to the taxation of long-term capital gains (LTCG) on real estate. These changes, outlined in the Union Budget 2024, have removed the indexation benefit for properties purchased after July 23, 2024. This shift is set to have a wide-reaching impact on property buyers and investors across the country. In this article, we will explore what these changes mean, how they affect property transactions, and what strategies buyers can adopt to navigate this new landscape.

Understanding Indexation and Its Removal

One way of compensating for inflation in an asset’s purchase price is through indexation. This adjustment lowers the taxable gain when the asset is sold, thereby reducing the tax liability. For years, this benefit has been a key factor in reducing the tax burden on property sellers in India.
However, with the new tax rules, the government has removed the indexation benefit for properties purchased after July 23, 2024. This means that while the LTCG tax rate has been reduced from 20% to 12.5%, sellers will no longer be able to adjust their purchase price for inflation, potentially leading to higher taxes despite the lower rate​ (India Today)​ (Finance News).

Impact on Property Purchases

The removal of the indexation benefit introduces a significant shift in how property buyers and sellers approach real estate transactions. For properties purchased before July 23, 2024, sellers can still choose between the old tax regime (20% LTCG with indexation) and the new regime (12.5% LTCG without indexation). This flexibility allows property owners to select the option that results in the lowest tax liability.
However, for properties bought after the cut-off date, the choice is no longer available. The new rules apply uniformly, meaning all such transactions will be subject to the 12.5% tax rate without any adjustment for inflation​ (India Today).

Comparing Tax Options

For property owners, the choice between the old and new tax regimes can significantly impact their financial outcomes. High-end properties, which typically appreciate significantly over time, might still benefit from the old regime’s indexation benefit. On the other hand, properties with lower appreciation rates or those held for shorter periods might find the new 12.5% tax rate more advantageous.
For instance, under the old regime, a property bought for ₹1 crore in 2001 and sold for ₹5 crores in 2024 could have seen its purchase price adjusted for inflation, resulting in lower taxable gains. Without indexation, the entire profit would be subject to the 12.5% tax, potentially increasing the seller’s tax burden​ (India Today)​ (Finance News).

Market Implications

The market response to these changes has been mixed. Markets like Mumbai and the National Capital Region (NCR), which see high investor activity, are likely to experience a slowdown in investment demand. Conversely, On the other hand, end-user-driven markets like Pune and Bangalore might be less affected.
Additionally, there is concern that the removal of the indexation benefit might encourage cash transactions in real estate, which could counter the government’s efforts to increase transparency in the sector​ (Finance News)​ (India Today).

Investment Strategies Moving Forward

Given the new tax rules, property buyers and investors need to reassess their strategies. For those considering long-term investments, particularly in high-end properties, it would have been worth it, if they had acted before July 23, 2024. For others, focusing on properties that are likely to appreciate significantly over time or those in markets with strong demand may help offset the higher tax burden under the new regime.
Moreover, buyers should consider consulting with tax professionals to fully understand how these changes impact their specific situations and to make informed decisions that align with their financial goals​ (India Today).

The removal of the indexation benefit marks a major shift in the taxation of real estate in India. While it simplifies the tax regime, it also poses new challenges for property buyers and sellers. By understanding these changes and adjusting their strategies accordingly, buyers can navigate this new landscape more effectively and make the most of their real estate investments.