Question:
Is the removal of indexation on the sale of immovable properties, as announced under the recent Budget, a red herring for the increase in stamp duty values for immovable properties by respective state governments?
Dissection:
Recently, the indexation “benefit”, which factors in inflation adjustment, on the sale of a capital asset, excluding listed shares/securities, but including immovable properties, was removed as a supposedly consequential reduction of long-term capital gains tax from 20% to 12.5%.
For example: If a property bought for INR 100 in 2001 increases at a rate of 7% per annum, then the fair value of the same would be around INR 435. Under the old regime, it would have resulted in an inflation-adjusted indexed cost of approximately INR 360, and so the net tax outflow at 20% would be INR 15 on capital gains of INR 75.
Under the new regime without indexation, the capital gains would be INR 335, resulting in a net tax outflow of INR 42!
Given the above, there has been a lot of discussion that cash transactions will increase to undervalue real estate sales – however, if this hypothesis is true, then the respective state governments would then increase the stamp duty values of immovable properties. This is so because the minimum value for computing capital gains is the stamp duty value, and any increase in the stamp duty value of immovable properties would lead to re-basing the deemed consideration for tax purposes, definitely resulting in higher tax outflows!