Rollback of LTCG, STCG hike unlikely; modifications for pre-2012 homebuyers possible if...: Neelkanth Mishra

Neelkanth Mishra, Chief Economist, Axis Bank

With respect to real estate, rolling back the capital gains tax changes seems unlikely, although there may be some modifications or grandfathering provisions for specific groups, particularly those who bought real estate between 2001 and 2012, Neelkanth Mishra, Chief Economist at Axis Bank, told Moneycontrol.

The budget 2024 announced the removal of indexation benefit available on sale of property and reduced the rate from 20% to 12.5%. Indexation adjusts the cost of assets for inflation to calculate capital gains more fairly. Without indexation, capital gains are simply the difference between the sale price and purchase price. For long-held assets like property, this can lead to disproportionately high gains.

The government clarified that properties purchased before 2001 will retain indexation benefits for tax purposes, using either the 2001 price or the indexed price up to 2001, whichever is lower. Properties bought after 2001 will be taxed at a flat rate of 12.5 percent without indexation.

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For example, a Delhi house bought in 2001 for Rs 80 lakh and now worth Rs 12 crore would show a capital gain of Rs 11.2 crore without indexation. With indexation, the acquisition cost adjusts to Rs 2.9 crore, reducing the capital gain to Rs 9.1 crore.

Mishra said that for real estate purchased after 2001, the removal of indexation benefits means early investors may face larger capital gains taxes if they sell now. "While there is no denying that it is a concern, the reduced number of sales could actually benefit the real estate market. With fewer sellers and steady demand from buyers, this could create upward pressure on prices," Mishra said.

He said, "The likelihood of rolling it back seems very low. If there is a severe concern about certain brackets of homebuyers -- people who bought between 2001 and 2012 which was a period of high inflation -- maybe some modifications possibly can be considered.” Mishra qualified that adding, “I have no idea how the government thinks about these things. But a rollback seems very unlikely."

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Although it's unfortunate for those facing higher taxes on older properties, the overall market outlook might not be severely impacted, said Mishra. Despite concerns about reduced inflation indexation making real estate less attractive, Mishra does not foresee a significant decline in its appeal. Real estate performance is more influenced by market cycles than by tax rate adjustments.

Given that the rationalisation of tax rates has been a topic since the 2023 budget and has been continuously highlighted by senior finance ministry officials, including discussions following the 2024 vote, it's unlikely that a complete rollback will occur, Mishra said. He added that for those buying real estate for residential purpose (as opposed to investing), these tax changes won’t mean much.

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The changes announced under the Union Budget on the capital gains would be effective starting July 23. This means that even if an advance has been paid prior to the announcement, but the agreement hasn't yet been signed, then the loss on indexation would be applicable.

Mishra said that real estate has underperformed over the last decade, with only a recent upswing in the past 2-3 years following Covid. This, Mishra said, suggests that the real estate market is still in the early stages of recovery.

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