Budget 2024 Announcement: Finance Minister Nirmala Sitharaman presented the first budget of the third term of the Modi government and in the very first budget gave a big blow to the middle class. Those middle class people who have their own house and property and decide to sell it, their profits are severely affected. According to the announcement by the Finance Minister, the benefits of indexation will not be available on real estate transactions in which the purchase price is adjusted for inflation. If they do not get these benefits, they may have to pay more tax on property sale. Due to this decision of the Finance Minister, Nifty Realty Index fell by more than 2 percent.
Understand with an example, how big is the shock.
Let us assume that you bought a property in 2004-05 for Rs 50 lakh. Now its value has increased to Rs 2 crore in 2024-25. According to the earlier rule, if you sell this property, you would get indexation benefit in tax calculation. How much benefit would I get? In 2004-05, the cost inflation index was 113 and in 2024-25 it is 363, that is, after adjusting for inflation, the purchase value of this property i.e. indexed cost of acquisition came to around Rs 1.60 crore. Now the difference between the purchase price and the sale price i.e. Rs 2 crore i.e. around Rs 40 lakh will be considered as capital gain and tax will be calculated on it. However, now when indexation benefit will not be available, tax liability will be incurred on the difference between purchase price i.e. Rs 50 lakh and sale price i.e. Rs 2 crore, i.e. profit of Rs 1.5 crore. In this way, we can understand how big a blow the middle class has received due to the decision of the Finance Minister. The government releases the Cost Inflation Index from time to time.
tax rate reduction solution
The Finance Minister has withdrawn the indexation benefit but has also imposed a reduction in the tax rate on long term capital gains on sale of property. According to the announcement of the Finance Minister, now tax on the sale of property will have to be paid at the rate of 12.5 percent instead of 20 percent but without indexation benefit. However, there was a possibility of zero tax liability through indexation benefit.
Will people of small towns feel more shocked?
Experts believe that this decision of the Finance Minister has dealt a big blow to the middle class but the people of small towns will feel it more. Samantak Das, Chief Economist and Research Head, JLL India, believes that the new system will be beneficial if the property is sold at such a high price that it is more than the price calculated through the Cost Inflation Index (CII). However, experts also believe that in most of the cases, property prices in small cities do not increase so fast.
Will real estate take a hit?
According to Abhilash Pillai, partner of Cyril Amarchand Mangaldas, this decision has also dealt a blow to the real estate sector. According to Abhilash, real estate has been the favorite investment option for the people of the nineties and the first decade of the 21st century. People also knew that due to indexation benefit they would not have to pay tax on the entire profit. However, if indexation benefit is not available now, the middle class will not find this option attractive as an investment, which means there is a possibility of recession in the real estate sector.
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