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Explained: How the removal of indexation benefits will hit property buyers hard

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real estate propExplained: How the removal of indexation benefits will hit property buyers harderty

The recent removal of indexation benefits on long-term capital gains (LTCG) from property sales is poised to significantly impact the Indian real estate market. Previously, indexation allowed property sellers to adjust the purchase price of an asset for inflation, thereby reducing the taxable gains and lowering the tax burden on profits from property sales. The elimination of this benefit will now increase the tax liability for sellers, potentially altering market dynamics.

How will it affect the property sale?

Without indexation, sellers will face higher taxes on the profits from the sale of real estate. For instance, if a property bought for ₹50 lakh is sold for ₹1 crore after ten years, previously, the seller could adjust the purchase price for inflation, reducing the taxable gain. Without indexation, the entire profit of ₹50 lakh will be subject to LTCG tax at 12.5 percent significantly increasing the seller’s tax liability. However, earlier the tax rates were 20 percent, but government use to take the price inflation during the period .

How will it affect the real estate market ?

Decrease in Transactions: The increased tax burden may lead to a slowdown in the number of property transactions. Sellers might be less inclined to sell properties, anticipating higher tax payments.

Price Adjustments: To offset the increased tax liability, sellers may increase property prices, affecting affordability for buyers. Alternatively, the market could see a reduction in property prices as sellers attempt to attract buyers in a potentially slower market.

Shift in Investment Patterns: Real estate has been a preferred investment option due to its relatively lower tax burden with indexation benefits. With these benefits removed, investors might shift towards other investment avenues with better tax efficiencies, such as equities or bonds.

Expert perspectives

niranjan hiranandani

Dr Niranjan Hiranandani, Chairman, NAREDCO said, “The removal of the indexation benefit for long-term capital gains in real estate is likely to significantly impact property owners’ holdings assets for more than ten years.” “Owners of heritage homes may face a higher tax burden upon sale, as the absence of indexation prevents adjusting the property’s cost basis for inflation.”

He further added that, “The change could result in higher taxes for individuals who want to sell assets held for more than ten years. On the contrary, new investors holding properties for more than 2 years will benefit from the lower long-term capital gains tax, potentially making short-and mid-term investments more attractive. Hence, taking away indexation benefits won’t hurt real estate investment going forward. Thus, equalising the asset classes such as real estate and the capital market will present investors with more attractive options for parking their earnings into real estate.”

chintan vasani

Chintan Vasani Founder Partner, Wisebiz Developers said, “ With the LTCG increasing from 10% to 12.5%, long-term investors might face higher taxes. However, the ₹1.25 lakh exemption could offer modest benefits to small investors. The recent changes bring both positive and negative outcomes, varying based on individual circumstances. While indexation benefits have been removed, the reduced tax rate provides some relief. The impact hinges on factors like purchase and sale prices. A significant price gap may lead to a loss without indexation, while a small gap could result in tax savings. The key lies in analysing the purchase-sale price differential for personalized tax implications.” 

The Government’s take

Stating the idea behind this change, Finance Minister Nirmala Sitharaman said, “We wanted to simplify the approach to taxation, especially for capital gains. The average taxation has come down. When we say it is 12.5%, it is because we have calculated it for each of the different classes. We have brought it down to 12.5%, which is the lowest in several years, encouraging investment in the market.”

Taking to social media after the outroar, the Income Tax department denied that people will have to pay higher taxes on profits made on selling a house, stating that nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation rate of 4-5 per cent.

Marksmen Daily’s take

The decision to remove indexation benefits is a major move, that will doubtlessly raise the tax burden of property sellers, and reduce the viability of real estate as an investment class. If anything, it could spur investors to hold onto residential properties longer, and perhaps even spark a rise in cash transactions, an undesirable side effect for the government without a doubt.


In essence, if you are an end-user looking to simply sell your home to buy a new one, you will be largely unaffected so long as you plough the money from the old home into the new one and your property price appreciation is less than 10% per annum. But if you are an investor looking to sell off your property to invest it elsewhere, we would advise you to think twice, unless you’re confident that the gains from such investment will outstrip the tax to be paid on your property gain.

A robust real estate sector is vital for economic growth, and this move could stymie its growth, rather than offer a stimulus. Millennials already favour paying rent over investing in properties, and this move will only entrench that sentiment further, potentially impacting the affordable housing segment the most. But truthfully, the impact of this will be felt by one and all, investor or not, as there is now no respite for the common man or well-heeled investor from the ravages of inflation and taxation.