Former Infosys CFO TV Mohandas Pai has questioned the income tax department’s assumptions about property price growth in India.
“Can @IncomeTaxIndia please explain how they assumed property prices go up 12-16% per year? RBI says NO, citizens need this answer,” he wrote on X. Pai pointed to a significant disconnect between the tax department’s projections and real market data.
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According to the RBI Housing Price Index, the compound annual growth rate (CAGR) for property prices over the last decade is far more modest, ranging between 1% and 9% in major cities such as Bangalore, Chennai, Delhi, Kolkata, and Mumbai.
Data from Knight Frank and the RBI further corroborate that while some regions may see higher returns, overall market trends are more subdued.
This divergence is pertinent in light of the Union Budget 2024, which introduces substantial changes to the taxation of long-term capital gains (LTCG) on real estate transactions. The most contentious of these changes is the removal of indexation benefits, a move that is expected to significantly increase tax obligations for property owners.
Ajay Seth, Secretary of the Department of Economic Affairs, addressed these concerns during the India Today-Business Today Budget Round Table 2024. He explained that the government’s shift away from preferential tax treatment for certain asset classes aims to create a more equitable taxation system. Seth emphasized that the decision to eliminate indexation was not primarily about generating revenue but about reflecting inflation’s true impact on investment returns. “Ultimately, investors are best positioned to assess their risk tolerance and potential returns,” he added.
The Union Budget 2024 introduces significant changes to the treatment of LTCG in property transactions, most notably the elimination of indexation benefits. This adjustment is expected to lead to substantial increases in LTCG tax obligations, with some estimates suggesting a rise of up to 290% for properties acquired post-2010.
Historically, indexation has been used to adjust the original purchase price of an asset to account for inflation, resulting in a more accurate calculation of taxable gains upon sale. The new tax regime replaces this approach with a flat LTCG tax rate of 12.5%, down from the previous 20%, but without the mitigating effect of indexation.
Adhil Shetty, CEO of BankBazaar, highlighted the implications of this change in a recent report. The analysis showed significant tax increases for property owners, particularly those holding assets for extended periods. Properties purchased before 2001 will continue to enjoy indexation benefits, but those acquired afterward will face the full brunt of the new tax rules. The report also pointed out regional disparities, with cities like Mumbai and Kolkata experiencing particularly high tax burdens under the new regime.