The Hindu Newspaper Analysis
Editorial Topic :On Discarding Indexation for LTCG
GS-3 Mains Exam : Economy
Revision Notes
Context
- FM Nirmala Sitharaman proposed flat 12.5% LTCG tax, replacing tiered structure.
- Eliminated indexation benefit.
Purpose of Indexation
- Accounts for inflation during asset holding period.
- Reduces taxable gains by adjusting purchase price using Cost Inflation Index (CII).
- Example: House bought for ₹10 lakh in 2001 sold for ₹75 lakh in 2021.
- Indexed cost: ₹31.7 lakh (using CII).
- Taxable gain: ₹43.3 lakh.
Issue with New System
- Not all assets appreciate exponentially.
- Indexation more favorable in flat or slump markets.
- Example: House sold for ₹40 lakh in 2021.
- Tax liability with indexation: ₹1.66 lakh.
- Tax liability without indexation: ₹3.75 lakh.
- Study: LTCG tax tripled for properties bought after 2010 without indexation.
- Income Tax Dept.: Real estate returns (12-16%) higher than inflation (4-5%).
- Economists: Benefits higher for quick sales (3-4 years) than long-term holding.
- REITs and infrastructure funds suffer due to lower returns.
Impact on Assets
- Overall sentiment dampened despite lower tax rate.
- Impact varies by asset type and purchase time.
- Potential decline in investment property purchases.
- Incentive for quick sales to benefit from lower tax rate.
- Minimal impact on residential purchases.
- Option for pre-2001 assets: choose between fair market value on April 1, 2001 or actual cost.
Concerns
- Potential undervaluation of properties to reduce tax liability.
- Increased black money transactions in real estate.
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