Former Infosys CFO TV Mohandas Pai in a recent post on X raised concerns about the Income Tax Department's assumptions regarding property price growth in India. Pai questioned the department's projection of property prices increasing by 12-16 per cent per year, highlighting a discrepancy with data from the Reserve Bank of India (RBI).
"Can @IncomeTaxIndia please explain how they assumed property prices go up 12-16per cent per year? RBI says NO, citizens need this answer," Pai wrote. He pointed to a significant disconnect between the tax department's projections and real market data.
According to the RBI Housing Price Index, the compound annual growth rate (CAGR) for property prices over the last decade is considerably lower, ranging between 1 per cent and 9 per cent in major cities such as Bangalore, Chennai, Delhi, Kolkata, and Mumbai. Data from Knight Frank and the RBI support these findings, indicating that while some regions may experience higher returns, the overall market trend is more subdued.
This issue is particularly relevant in light of the Union Budget 2024, which introduces substantial changes to the taxation of long-term capital gains (LTCG) on real estate transactions. The most contentious change is the removal of indexation benefits, a move that is expected to significantly increase tax obligations for property owners.
The Union Budget 2024 proposes notable changes to the treatment of LTCG in property transactions, including the elimination of indexation benefits. This adjustment is anticipated to lead to substantial increases in LTCG tax obligations, with some estimates suggesting a rise of up to 290 per cent for properties acquired post-2010.
Historically, indexation has been used to adjust the original purchase price of an asset to account for inflation, resulting in a more accurate calculation of taxable gains upon sale. The new tax regime replaces this approach with a flat LTCG tax rate of 12.5 per cent, down from the previous 20 per cent, but without the mitigating effect of indexation.