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'For me, if I want to buy a house to stay, I don't care about indexation because I don't want to sell that house.'
'The only thing that matters to me as a buyer is that the home price should be within my reach.
'Any market, when speculators and investors go out, it will benefit the middle class.'
Amit Malviya, who supervises the Bharatiya Janata Party's IT cell, came under fire on social media when he tweeted after the Budget, 'Everyone is an indexation specialist tonight.'
Malviya's tweet came after Finance Minister Nirmala Sitharaman was being criticised on social media for the withdrawal of indexation on property sales.
Later, Malviya, a former banker, deleted his post after facing flak for being insensitive to the public's concerns.
The incident explains the strong public sentiment over the issue.
But what is property indexation?
And why is there a hue and cry over its removal?
How did it benefit home buyers?
To get answers, Syed Firdaus Ashraf/Rediff.com spoke to Dr Prashant Thakur, regional director & head-research, ANAROCK Group.
The withdrawal of indexation on property sale in the Budget, is it a good move or not? Some say it is good as first time home buyers will be in an advantageous position. Can you break it down for us, the pluses and minuses of this move?
Let us take the plus points first: The long term capital gains tax has fallen from 20 percent to 12.5 percent. The holding period of real estate was for three years, and now it has been brought down to two years. Capital gains tax exemption was Rs 1 lakh but after this Budget it is Rs 1.25 lakhs.
Coming to the negative points, indexation benefit has been taken away as many people are stating.
Now to explain what were the indexation benefits.
Before going into that detail, let us clarify that any property that you have purchased or inherited before 2001 continues to get indexation benefit.
For property indexation the government fixes a cost of inflation index (CII) every year.
For CII, the government assumes 4 percent inflation every year whereas property prices approximately rise by 12 percent every year.
When indexation benefit was allowed, the capital gains was 8 percent (12 percent minus 4 percent). And the capital gains tax was 20 percent on this 8 percent (gain).
If indexation benefit is not allowed after the Budget, then capital gains will be the inflation of the property price, that is 12 percent every year, but the capital gain tax will be 12.5 percent of this 12 percent.
Furthermore, as mentioned earlier, the capital gains tax exemption was Rs 1 lakh and now it is 125,000 so there will be a marginal change in the capital gains tax on property sale. In a nutshell, the impact is negligible.
But the message that is going out is that the government is penalising the investor class by dumping indexation. In other words, they are disincentivising investment in property.
It is not like that. You have to understand the broad message. The Budget is trying to control speculation in stocks as well as the property market. Investors are good but speculation takes the market out of reach (for the common man).
If I am an investor and I invest in a property I can now sell in two years, unlike earlier where I could not sell for three years. This is a benefit for an investor.
Now in two years, say, my property price rose by 20 percent, how much of the property indexation price would have benefited me?
Earlier I was paying 20 percent tax on the property and now I am paying 12.5 percent with indexation gone. So the impact to me as an investor, in a nutshell, is zero.
So why are people voicing so much angst over the removal of indexation?
The reason is that earlier they used to circumvent this rule and claim capital gains losses.
For example, I would show the property at a lower rate and show that my property has not appreciated as per indexation and claim capital gains losses.
Secondly, even today not many journalists and experts are trying to figure out whether taking out indexation is good or bad.
On a broader picture, if investors and speculators keep away, then prices of homes will normalise.
In the last three years the prices have already appreciated by 25 to 30 percent.
For me, if I want to buy a house to stay, I don't care about indexation because I don't want to sell that house. The only thing that matters to me as a buyer is that the home price should be within my reach.
Any market, when speculators and investors go out, it will benefit the middle class.
Today, 80 percent of home buyers want to buy a home for their own end use. They do not want to gain monetarily from their property by selling it, because it is their home.
Does this mean, as a social media post said, the message from the Budget to property speculators is 'sirf apna ek ghar rakho aur khush raho'? And it is the upper middle class who are doing rona dhona as they are in shock over where to invest other than real estate?
Today, the middle class when it checks its pocket and looks at stock prices or housing prices, they feel left out. The government in this Budget wants to make homes affordable not only for the middle class but the broader segments of the society.
They want to make homes affordable for the entire spectrum of the population.
Will this move result in home prices becoming stable as investors will keep away?
If you want to buy a house today and you will sell after 10 years, then there is no problem.
Anyway, the government takes into account inflation of 4 percent every year for the housing sector. The prices will rise sufficiently where the (removal of) indexation will not impact you much.
People are only talking about indexation going away because they want to show their capital gains losses.
If you sell a property bought after 2001 and do not invest in a property immediately, will the additional gain or profit on property be taxed immediately? So how long do I have to invest in fresh property without incurring tax outgo?
For three years you are allowed to carry on (via capital gains account, RBI bonds). And if you buy another house in three years there will be no tax. After that there will be taxes.
If I keep the additional profit from house sale and put it in LTCG bonds for three years, will that money be taxed?
It will be taxed. The interest or any income that you earn, if you don’t buy a house, the entire amount will be taxed as capital gains tax.
Will we see the return of black money in real estate business due to this move as sellers may prefer cash payment to avoid tax liability?
This is another fear but arranging for black money is a big challenge.
People will want to show lower price for their property but if you are a buyer then you will not accept it because if you are selling it later, for that same property your capital gains tax will be higher.
There will be a counter balance. Arranging Rs 50 lakh in black money for a regular person is next to impossible.
So the impact on property prices will be there after this budget and the removal of indexation?
No doubt there will be reduced speculator activity in real estate market.
Normal people will not be affected by the removal of indexation. He is buying the property for end use and not to sell the property. He is buying the property to live.
Do you feel the government has failed to convince people on indexation as many social media posts are against the Budget's impact on real estate?
These are investors and speculators who are shouting from the rooftops.
The government is very clear, as they want to rationalise all the taxes. They want to reduce speculative (trading) on stock market, that is the reason they have increased short term capital gains tax from 15 to 20 percent, which is steep.
They have also increased the securities transaction tax which is on futures and options quite steeply.
They have increased the capital gains tax to 12.5 percent.
For real estate it has declined but for other equities it has increased, as it was 10 percent earlier.
The government is trying to simplify things.
The message is that the middle class will suffer due to the removal of property indexation.
The middle class will not suffer from the removal of property indexation. In the long term, they will benefit.
The prices of homes will not shoot up randomly.
Investors and speculators will take a pause, and that will be good for the middle class.