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Tata Capital > Blog > Wealth Services > Budget 2024: Removal Of Indexation and Its Impact on Real Estate

Wealth Services

Budget 2024: Removal Of Indexation and Its Impact on Real Estate

Budget 2024: Removal Of Indexation and Its Impact on Real Estate

The Union Budget 2024 has introduced several pivotal changes, such as changes in tax rates for Long Term Capital Gains (LTCG), their holding periods, tax slabs, etc. But one that has captured significant attention is the changes in indexation benefits for real estate investments.

This move, aimed at simplifying the tax structure, has left many investors and homeowners wondering about its potential impact. While indexation has traditionally helped reduce tax burdens by accounting for inflation, its removal presents a new dynamic in the real estate market.

In this article, we’ll explore how this change could influence property investments and why it might just be a fresh avenue for strategic planning in the real estate sector.

What is Indexation, and How Does it Affect Your Capital Gains?

Before we begin discussing how the removal of indexation affects the real estate market, it’s important to understand indexation. Indexation is a method that allows us to adjust the price of something with the rising cost of living.

This allows you to protect your money from losing value due to inflation. In other words, it helps you ensure that the money you have keeps its value over time. Indexation helps you adjust the price of investments to reduce your tax liability.

Now, capital gains refer to the increase in the value of an investment over a given period of time. For instance, if the Net Asset Value (NAV) of a RE is Rs 10 in 2021 and Rs 15 in 2024, the rise in value will be referred to as capital gains. When you apply the method of indexation to your capital gains, you can reduce the long-term capital gains, bringing down your taxable income.

Changes in Indexation Introduced in the Union Budget 2024

The Union Budget 2024-25 has rocked the boat and changed the way capital gains are taxed. It has removed indexation benefits for long term capital gains on property. In other words, you cannot adjust the purchase price of your property for inflation when you calculate your tax any longer.

That said, the tax rate on long term capital gains from property has also been reduced to 12.5% from 20%. This is applicable only on RE purchased post July 2024 Budget. The budget 2024 reduced tax rate on long term capital gains to 12.5% from 20% and removed the benefit of indexation. A later amendment of the LTCG tax rule allowed people to choose between two options for property bought before July 23, 2024: 20% tax rate with indexation benefit or 12.5% tax rate without the indexation benefit.

How Does the Change in Indexation Impact Real Estate?

While the reduction in tax rate does offer a small benefit, the removal of indexation can still drive your tax bill, especially if you bought your property a significant time ago. These two changes can reduce property prices and negatively impact investor sentiment.

Due to the higher tax rate, the sector can seem less profitable for short term investors. However, first-time home buyers might benefit from possible price reductions in the market.

Long term investors will now have a higher tax burden, making property investment less lucrative than other investments.

To Sum Up

The removal of indexation in Budget 2024 marks a significant shift in the real estate investment landscape, presenting both challenges and opportunities for investors. While the absence of indexation benefits may alter the tax dynamics, it also encourages a more strategic approach to property investments, focusing on long-term gains and diversified portfolios.

Expert guidance is crucial for investors seeking to navigate these changes effectively. Tata Capital Wealth offers tailored wealth management solutions that can help you make informed decisions in this evolving market. With our comprehensive financial planning services, we can assist you in optimising your real estate investments, ensuring that your portfolio remains robust and growth-oriented. Partner with Tata Capital Wealth and benefit from our insights and expertise to secure your financial future in this new tax regime.

To learn more about our services, visit the Tata Capital Wealth website today!

This article is only for information purposes. The information given in this article is subject to change in future as per government and relevant policy changes which may not be reflected in the article. Readers are requested to check the relevant government website for latest update on relevant policies and figures.

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