Q & A by Vinod Behl

Q  This year’s budget has scrapped indexation benefits under LTCG Tax… Will it have a negative impact on real estate investments?

Rajat Sinha, Gurgaon

A: The new LTCG tax provision of abolishing indexation benefit in this year’s budget has created apprehensions in the minds of real estate investors largely due to lack of clear understanding of the issue . Many think that this may adversely impact their investment profits. However, this apprehension/fear is misplaced. This change has been brought in to simplify the LTCG procedure. Moreover, any potential loss by way of scrapping indexation benefits , has been well compensated with the sharp cut in LTCG tax from 20 percent to 12.5 percent.

LTCG tax is calculated by finding the difference between the sale price of the property and the acquisition cost of the property. The indexation benefit helped property sellers by adjusting gains against inflation determined from the official cost inflation index.  . This helped reduce the taxable gain on sale of property, thus benefiting the property seller.

The whole idea behind the scrapping of indexation benefits is to discourage speculative buying and check artificial heating up of prices. The new indexation rules may well impact those high end investors who invest in several properties with long holding periods. This does not affect those who invest in homes for personal use or for rental purposes . The CBDT has already allayed the fears adding that compared to 4-5 percent of indexation benefit, (depending on holding period) , the returns on property are much higher at 12-16 percent. Add to this the benefit of a reduction in LTCG tax, it is not a losing proposition