From simplicity to fairness: Indexation benefit for property restored. But is it enough?

livemint.com:

The recent amendment to the Finance Bill, which offers the choice of a 20% LTCG tax with indexation or a 12.5% tax without indexation forproperty deals before 23 July, is a welcome change. 

This move marks a U-turn from the finance minister's announcement in the Budget 2024 to remove indexation. However, the amendment should extend to future deals as well. Here's why:

Consider Mr A, who buys a property for ₹50 lakh, and Mr B, who buys one for ₹1 crore. After six years, both sell their properties for an additional ₹50 lakhs. Mr A sells his property for ₹1 crore, clocking a 100% return on investment (RoI), while Mr B sells for ₹1.5 crore, making a 50% return. 

Is it fair to tax the same amount for different RoIs over the long term? In such cases, indexation offers a fair basis to calculate LTCG.

Suppose Mr A and B acquired an asset for ₹1 crore in the same year but sold it after a different holding period. Mr A sold the asset after 10 years for ₹2 crore, while Mr B sold the asset after five years for ₹2 crore. Both end up paying the same amount of capital gain tax: ₹12.5 lakh (assuming no standard deduction for simplicity). 

Here, the internal rate of return (IRR) made by Mr A is 7%, and Mr B is 15%. Considering the inflation rate of6% per annum, Mr A hardly made any real returns, while Mr B made a real return of 9%. After a tax of 12.5% without indexation, Mr A earned an IRR of 5.8%, not even beating inflation, and thus incurred a loss in real terms. A fair policy should charge different taxes in such cases.

In an economy like India, with long-term high and fluctuating inflation, the impact on purchasing power is more pronounced and harsher. If sold recently, a house purchased decades ago would show considerable LTCG.