Impact of Removal of Indexation on Indian Real Estate Market

The removal of indexation in the budget for 2024 is expected to have a significant impact on the Indian real estate market. This change could affect property investments, capital gains taxes, and overall investor sentiment. Understanding the implications of this policy change is crucial for anyone involved in the real estate sector in India. By analysing how the removal of indexation will influence property values, taxation, and investment strategies, stakeholders can better prepare for the potential shifts in the market landscape. 

What is Indexation?

Indexation is a way to adjust something, like your salary or the price of an item, to match the rising cost of living. It's like giving yourself a raise when prices go up. This helps protect your money from losing value due to inflation. For example, if your salary is indexed to inflation, it will increase as prices rise, so you can still buy the same things.

Role of Indexation with example

Indexation is like a shield against inflation. It's a way to make sure that the money you have or earn keeps its value over time. For example, if you have a savings account and the interest rate is 5%, but the cost of living goes up by 3%, you're actually only gaining 2% in real terms. That's because your money can buy less as prices rise. Now, if your savings account is indexed to inflation, it means that the interest rate will go up along with the cost of living. So, if inflation jumps to 4%, the bank might raise the interest rate to 6%, keeping your real gain at 2%. This way, indexation helps your money stay strong, even when prices are climbing.

Recent Changes in Indexation Introduced in Budget 2024

The Budget 2024 brought significant changes to the way capital gains are taxed. One of the biggest impacts is the removal of indexation benefits for long-term capital gains on property. This means you can no longer adjust the purchase price of your property for inflation when calculating your tax. However, there's a silver lining; the tax rate on long-term capital gains from property has been reduced to 12.5%. While this is lower than before, the removal of indexation might still increase your tax bill, especially if you bought the property a long time ago.

How will the changes impact realty sector in India

The elimination of indexation, coupled with the reduced LTCG tax rate has a twofold effect. While the lower tax rate might seem attractive, the removal of indexation can significantly increase the tax liability on property sales, especially for long-term investments. This could dampen investor sentiment and potentially lead to a decrease in property prices.

1. For short-term investors: The sector becomes less lucrative due to the higher effective tax rate. However, first-time homebuyers might benefit from potential price corrections in the market.

2. Long-term investors: Will now face a higher tax burden, making property less attractive compared to other investment options. This could shift investment preferences towards other asset classes.

For example, consider a developer who purchased land in 2010 for INR 10 lakhs. If the same land is sold in 2024 for INR 50 lakhs, there is a substantial gain of INR 40 lakhs. However, due to inflation, the cost of the land in today's market may be much higher than the purchase price. With the new indexation rules, the developer can adjust the purchase price to reflect the current market rates, reducing the long-term capital gains and, consequently, the tax liability.

Overall, the changes introduced in Budget 2024 are likely to reshape the Indian real estate landscape, with potential implications for various stakeholders in the sector.

Role of Realty sector in GDP of India

The real estate sector is a major contributor to India's GDP. It drives economic growth by creating jobs, boosting related industries like construction materials and home appliances, and contributing significantly to government revenue through taxes.

Additional read: Role of Reality Sector in India's GDP

Way forward

The removal of indexation benefits in Budget 2024 is likely to impact the real estate market in several ways. Without indexation, property owners will no longer be able to adjust the purchase price of their property for inflation when calculating capital gains. This change will lead to higher taxable gains, and consequently, a higher tax liability when properties are sold. As a result, property transactions may slow down, as investors and homeowners might hold onto their properties longer to avoid paying higher taxes. This shift could lead to reduced liquidity in the market. Developers and real estate companies may need to adjust their strategies, focusing on affordable housing and innovative financing options to attract buyers despite the higher tax implications.

Conclusion

The removal of indexation in Budget 2024 is expected to raise taxable gains on property sales, leading to higher tax liabilities. This change could dampen investor sentiment, potentially decrease property prices, and investors might shift their investment preferences. First-time homebuyers may benefit from market corrections, but long-term investors will face greater tax burdens.