On Thursday, during the discussion on the Union Budget 2024-25, Aam Aadmi Party’s (AAP) Rajya Sabha member Raghav Chadha made a fiery speech, in which he condemned the government’s decision to remove indexation benefit on the sale of an old property.
Chadha said “Restore indexation on long-term capital gains. Throughout the world, to woo investors to invest they are incentivised. In this country, by removing indexation we are disincentivising the investor class.”
Criticising the step proposed by Finance Minister Nirmala Sitharaman in the Budget 2024-25, the AAP MP said “Removing indexation is not imposing tax but it is equivalent to penalising investors.”
Chadha said “Inflation ravages the value of money, paise ko khaa jata hai inflation (inflation eats up money) and that is why the calculation of capital gains tax is done by indexing the cost of acquisition. And I have brought an example for those who are happy today that capital gains tax has been reduced from 20% to 12.5%.
Through this, we will understand how removing indexation is like a huge robbery on the pocket of the investors of this country.”
Raghav Chadha’s Explanation
Giving an example of a person buying a plot at Rs. 1 crore in 2001 and selling it now for Rs. 4 crore and 17 lakh he said “Now there are two scenarios, one is indexation scenario in which what you sell is taxed and a new scenario in which you sell it it will be tax according to the new rate. I will first think according to the old system, according to the indexation system, and tell you how much tax will be charged on this.”
“Today, that house which you bought in the year 2001 for Rs. 1 crore, you sell it for Rs. 4 crore and 17 lakh.
Then your sale price is Rs. 4 Crore 17 lakh but your purchase price, Inflation Adjusted Index Purchase Price, is not Rs. 1 crore but about Rs. 3 crore and 60 lakh i.e. your sale price minus purchase price which is profit on sale is Rs. 54 lakh.
On that Rs. 54 lakh a 20% tax is levied i.e. with the indexation formula the total tax you have to pay is Rs. 10,80,000, I will round off the amount to Rs. 11 lakh.”
Explaining the new system he said “But with the new system in which indexation is taken away from you, in it the
- Sale Price is Rs. 4 crore 17 lakh,
- Cost Price Rs. 1 crore,
- Profit Rs. 3 crore 17 lakh and
- then a tax of 12.5% on top of it i.e. total tax combined comes out to be Rs. 39,62,000.
This means in the new system the same house of Rs. 1 crore which you sell for Rs. 4 crores and 17 lakh today, then you will have to pay a tax of almost Rs. 40 lakh while under the old system, you would have had to pay just Rs. 11 lakh in tax. This comes out to be that you will have to pay Rs. 29 lakh additional tax on the sale of a Rs. 1 crore of plot. This is the game of indexation.”
He further commented “If you do not bring back indexation three things will happen in this country. First, investment in real estate will go down and people will never be able to buy their ‘dream homes’,” and a higher tax will be applied on individuals selling old properties.
Second, he said, “There will be an undervaluation of property deals and people will start buying and selling properties on circle rates and will never disclose the real value of property.”
Chadha continued saying “Third, there will be a huge inflow of black money if you don’t roll back this decision to withdraw indexation,” due to people undervaluing property deals and being hesitant to disclose the real value of the property, choosing to buy real estate at ‘circle rates’ instead.
What Was Indexation Benefit?
In layman’s language, indexation is a way to adjust the purchase price of an investment to show inflation’s effect on it. What this did was allow taxpayers a way to significantly reduce their tax payments depending on how long they have owned a property.
As per a report by The Economic Times “In cases where inflation outpaced the increase in property value or if the property lost value, taxpayers could claim a capital loss. This allowed them to offset taxes on other capital gains incurred during the year, potentially reducing their overall tax liability.”
The indexation benefit is calculated using the cost inflation index (CII) by the income tax department and see what the inflation-adjusted cost of acquiring specific assets would be.
According to ET “The formula to calculate the inflation-adjusted cost is: Indexed cost of acquisition = (Cost of acquisition * CII of year of sale)/CII of year of purchase.”
This was quite a big benefit to asset owners since adjusting the price of an asset to inflation would increase its acquisition cost in turn reducing the long-term capital gains tax.
What Does Removal Of Indexation Mean?
Finance Minister Nirmala Sitharaman presented the 2024 Union Budget on 23rd July 2024 and since then a lot of debate and criticism has been sparked especially about how it is not middle class or taxpayer friendly.
One of the points brought up is how the government might have reduced long-term capital gains tax on immovable properties to 12.5 percent from 20 percent, however, it has removed the indexation benefits in order to adjust with inflation. This along with a 20% tax introduction on returns from assets is not being appreciated by the public.
As per a Moneycontrol report “As per the Memorandum to the Union Budget, with rationalisation of rate to 12.5 per cent, indexation available under Section 48 of the Income Tax Act has been proposed to be removed for calculation of any long-term capital gains, which is presently available for property, gold and other unlisted assets.”
With the removal of this indexation benefit on all assets (excluding property acquired before 2001) it is assumed that the sale of long-term capital assets will now lead to a higher capital gains tax.
CA Narendra Sharma also explained in a LinkedIn post on what this means writing “Recently Budget has announced rate cut in Capital gains tax for real estate.
Capital gains tax has been reduced from 20% to 12.5%.
But government has removed indexation benefits on long term capital gains calculations. Because of these changes some property owners may get higher capital gains tax at the time of selling their proprty.
Indexation cost is the cost of property which is calculated by taking inflation into consideration. This changes might effect demand in real estate as investment.
Please check new rule before selling you property!”
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Public Reaction
Many people seem to be in agreement with Raghav Chadha and want the indexation to be brought back.
https://x.com/AbhasHalakhandi/status/1816469121632014519
CA Vikram Biyani @CAVikramBiyani responding to the video of Raghav Chadha speaking on this wrote “3rd point – black money will be more in buying and selling of property is not a reality
If I buy a flat worth rs 1 Crore ( black 40 lac and white 60 lac ) then as per SDV concept , difference of 40 lac will be income under the head other source for buyer Seller – also fall under the provision of 50C where sale price will be SDV
Next COA for buyer will be 60 lac at the time of selling the property Lot of permutation combination are there so black money concept will not 100% true
As per report – Investment in property market will increase as price will be corrected for some time as right now it’s overvalued Note – I m against this provision for removing indexation as it’s very important for us as it helps to save the tax to set off the inflation”.
Highlighting the high tax burden that the common people are facing with this budget he said “We impose taxes like the Europeans do, to get services like sub-Saharan countries,” and asked for a comprehensive review of both direct and indirect taxes.
Image Credits: Google Images
Feature image designed by Saudamini Seth
Sources: Moneycontrol, Livemint, The Financial Express
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This post is tagged under: Raghav Chadha, Raghav Chadha aap, aap, Raghav Chadha speech, Raghav Chadha budget, union budget, India budget, finance, budget 2024, Finance Minister Nirmala Sitharaman, Finance Minister, Nirmala Sitharaman, rajya sabha, removed indexation budget, indexation properly, indexation benefit budget, indexation benefit removed
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