For property investors, one step forward and two steps back

livemint.com:

₹1 crore five years ago and valued at ₹1.47 crore today would incur a tax of ₹7.01 lakh without indexation, compared to ₹5.1 lakh with indexation. This represents a 37.54% increase in tax outflow despite the lower tax rate, explained Feroze Azeez, deputy chief executive of Anand Rathi Wealth Ltd.

“Our analysis of 1,686 properties held by clients on which we had information revealed that with indexation benefits, and at an effective tax rate of 23.92%, the tax liability is ₹184 crore, whereas without indexation at tax rate of 14.95%, it is ₹257 crore, which is 39.2% increase in tax liability post-budget," said Azeez. Here is how it works: Let’s say the cost inflation index (a measure of inflation) has increased from 100 to 150 over five years, and the value of a property bought for ₹1 crore five years ago has appreciated to ₹1.6 crore.

With indexation, the earlier long-term capital gains tax rate applied to the gain of ₹60 lakh after adjusting for inflation—20% on ₹10 lakh ( ₹60 lakh - ₹50 lakh). Under the new rule, the long-term capital gains tax is 12.5%, not 20%, but because there’s no adjusting for inflation, it will apply to the entire gain of ₹60 lakh.

So the effective tax to be paid is ₹2 lakh with indexation, and ₹7.5 lakh without adjusting for inflation. Also read | Capital gains tax shocker: What should investors do next? “The removal of indexation benefit could have been done in a more tax efficient way—either by grandfathering the fair market values or indexed cost of acquisition of properties till the budget day," said Bijal Ajinkya, partner at law firm Khaitan & Co.