Removing indexation on real estate will benefit almost nobody. Here's proof.
Selling property: Will your taxes skyrocket by 1,000% post Budget announcement? To quantify the impact, we analysed the compound annual growth rate (CAGR) of real estate prices, the holding period, and the cost inflation index. Our calculations show that the effective tax rate under the new regime is only lower if the real estate’s CAGR significantly exceeds historical averages. For a 20-year holding period with a cost inflation rate of 5.5% a year, the CAGR must be above 9.48% for the new tax structure to be advantageous.
An examination of actual performance of the real estate market provides more insights. Data from the National Housing Bank’s Residex, covering March 2013 to March 2024, shows the average CAGR of property prices across 36 Indian cities is just 5.11%. The highest recorded CAGR is 8.56% in Hyderabad, which is still below the threshold needed to benefit from the new tax regime.
This suggests that, contrary to the finance ministry’s claims, the effective tax burden will increase for most real estate investments. The demographic aspect of real estate transactions is another crucial consideration. Most real estate sales are conducted by individuals with annual incomes exceeding ₹15 lakh, meaning that the new tax policy will disproportionately affect higher-income groups.
While the government aims to redirect the increased tax revenue to support lower-income groups, doing so by presenting misleading claims that nominal real estate returns are in the 12-16% range is problematic. Such claims do not align with empirical data and undermine the credibility of the policy. Also read: Sold house in last 2 years? You may get both indexation benefit and lower 12.5% tax rate Also, the lack of indexation means that
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