Tax Proposal Sparks Debate in Indian Real Estate

The Indian real estate sector is grappling with uncertainty following the government’s proposal to eliminate indexation benefits for long-term capital gains in property sales. This move, introduced in Budget 2024-25, could significantly impact property owners, particularly those holding assets for more than ten years, including heritage home owners. Under the proposed changes, a flat 12.5% tax would be levied on capital gains from property sales, without the benefit of indexation.

This means that property owners would have to pay taxes on the full appreciation in value, even after accounting for inflation. Developers and industry experts argue that this could result in higher tax burdens for those selling long-held assets. The Income Tax Department, however, maintains that the proposed changes are fair and reasonable. They point out that nominal real estate returns in India typically exceed inflation rates, suggesting that property owners will not face a significant tax burden. However, real estate experts contest this view, noting that in some cases, returns on long-term property investments may fall below inflation. The removal of indexation benefits could have a significant impact on the secondary real estate market.

As sellers may face higher taxable capital gains, they may be less inclined to sell their properties, leading to a reduction in supply. This, in turn, could drive up property prices and limit investment opportunities. Despite the concerns, the Indian real estate sector remains cautiously optimistic. Industry leaders believe that the lower long-term capital gains tax rate could attract new investors, particularly those holding properties for more than two years. The simplified tax structure and the overall bullish economic outlook could also provide a boost to the sector. The government’s focus on simplifying the tax system is commendable. However, it is essential to ensure that the proposed changes do not have unintended consequences that could harm the real estate sector. A balanced approach that takes into account the diverse returns on long-term property investments is crucial for promoting growth and investment in the sector.