Introduction
Finance Bill (No. 2) 2024 amended the Second Proviso of Section 48 of the Income Tax Act and the with a stroke, the word indexation were removed from Income Tax Act along with the Cost of Acquisition and Cost of Improvement and thus attacking with the sword of taxation on the untaxed Long term Capital Gain incomes generated within the Real Estate Market. This was a bolt from the blue for the Real Estate Market especially for the properties which were kept for reaping the Long Term Gains. The Real Estate Market has not yet understood as to what the effect of this removal of indexation on the movement of the Prices, demand and supply will be because it was not thought of even while the Hon’ble Finance Minister was delivering the Budget Speech. Apart from the Real Estate Market, the Finance Professionals are not able to digest the removal of the Indexation of Cost of Acquisition and Cost of Improvement and they are correct only if they do not compare the Gains arising from the Immovable Property held for Long term with incomes earned from other Assets e.g. Fixed Deposits. To help our Fellow Professionals accept the fact of removal of indexation, I hereby attempt a comparative analysis of the taxation of income earned from the Immovable property held for earning Long Term Capital Gain with the most Common Assets which have been taxed at higher rates for a very long time.
Taxation of Real Estate in comparison with taxation of Fixed Deposit
Investing in a particular class of asset is a choice of the Investor and the investment in a Fixed interest/ income bearing investment has always been an option for an individual who has been investing for long term as well. To promote investment in Real Estate the benefit of indexation was introduced through Finance Act 1992 and since then it has been used largely while paying taxes. On the flipside, Investment in Real Estate always created an untaxed income which needed attention at the immediate and the following is the calculation of the untaxed income:-
Hypothetical Capital Gain Calculation (As per law prior to Finance Bill (No. 2) 2024)
Property purchased at Rs. 10,00,000 on 1st April 2001
Property sold for Rs. 50,00,000 on 27th July 2024
Capital Gain calculation will be as follows in the above case:-
10,00,000 X (363/100) = 36,30,000
Calculation of Tax
Full Value of Consideration = 50,00,000
Less: Indexed Cost of Acquisition = 36,30,000
Taxable Capital Gain = 13,70,000
Tax on Capital Gain (Prior to Finance Bill (No. 2) 2024 = 2,74,000
Now in the above situation Rs. 26,30,000 escaped taxation and created a tax-free capital receipt. On the contrary, the situation would be completely different if the entire amount was invested in the Fixed Deposit and the following will be the taxation of the income arising from the Fixed Deposit and for this purpose, we assume that the average rate of interest for each year is 6%
Invested in the Fixed Deposit in 2001 – 10,00,000
Value at the end of 2024 – 38,19,750
Earned interest in 2001 – 24 – 28,19,750*
*(At yearly Compounded rate of Interest of 6% for a period of 23 years)
This Rs. 28,19,750 earned is taxed in each year at an assumed rate of 30% and tax comes to around Rs. 8,45,925. Further when the entire amount was invested in the Fixed Deposit then there is no gain on redemption and only income in the form of interest which is further taxed in each and every year.
A comparison of the Real Estate investment and the Interest Bearing Fixed Deposit is as follows:-
From the above Comparison it can be seen that interest on Fixed deposit were at disadvantaged position as compared to real estate on following points:-
a. Taxed Multiple times
b. No relief in terms of Indexation for Fixed Deposits as it was for Real Estate Properties
c. No special rate of tax for Interest on Fixed Deposits
Conclusion
Fixed Deposits have been a source of household savings and further considered even a long term investment for earning regular income. They are prominent among the Senior Citizens who prefer it as an investment option much above other investment options and they even rely upon the same for earning a regular income. On the other hand, the Indexation enabled the investment in immovable property a safe haven for generating tax free income of around two to three times of the Cost of Acquisition and/or Cost of Improvement. This created an inequality and was never complained at any stage nor challenged by anyone and was rather silently enjoyed by the Real Estate owners. This tax – free income was a result of freebie, which became a norm, and later became a right of the owner of the Property. Removal of indexation was required to bring parity within Income Tax act on treatment of various incomes for the purpose of taxation and therefore it is a welcome step towards simplification of Long term Capital Gains
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