Property Price Growth Assumptions by the Income Tax Department
In a recent post on social media platform X, former Infosys CFO TV Mohandas Pai raised serious concerns regarding the assumptions made by the Income Tax Department about property price growth in India. Pai specifically questioned the department’s projection that property prices are increasing by 12-16 percent per year, contrasting this with data from the Reserve Bank of India (RBI).
Can @IncomeTaxIndia Pl explain how they assumed property prices goes up 12-16% per year? RBI says NO, citizens need this answer. @nsitharaman @FinMinIndia @narendramodi @PMOIndia @AmitShah @nitin_gadkari @PiyushGoyal https://t.co/INpjaOHujq
— Mohandas Pai (@TVMohandasPai) July 28, 2024
Discrepancy with RBI Data
Pai’s post highlights a significant disconnect between the Income Tax Department’s assumptions and real market data. According to the RBI Housing Price Index, the compound annual growth rate (CAGR) for property prices over the last decade ranges between just 1 percent and 9 percent in major cities like Bangalore, Chennai, Delhi, Kolkata, and Mumbai. This data suggests that the market trend is far more subdued than the department’s projections. Supporting this, research from Knight Frank and the RBI indicates that while some regions may experience higher returns, the overall property market growth is relatively modest.
“Can @IncomeTaxIndia please explain how they assumed property prices go up 12-16 percent per year? RBI says NO, citizens need this answer,” Pai wrote, emphasizing the need for the Income Tax Department to clarify their assumptions.
Impact of Union Budget 2024 on Property Taxation
The issue Pai raises is particularly pertinent in the context of the Union Budget 2024, which introduces significant changes to the taxation of long-term capital gains (LTCG) on real estate transactions. One of the most contentious changes is the removal of indexation benefits, a move expected to substantially increase tax obligations for property owners.
Elimination of Indexation Benefits
Historically, indexation has been a crucial mechanism allowing property owners to adjust the original purchase price of an asset to account for inflation. This adjustment provides a more accurate calculation of taxable gains upon sale. Under the new tax regime proposed in the Union Budget 2024, this approach is being replaced.
The budget proposes a flat LTCG tax rate of 12.5 percent, down from the previous 20 percent. However, this rate applies without the mitigating effect of indexation, leading to concerns about significantly higher tax burdens. Estimates suggest that for properties acquired post-2010, the change could result in LTCG tax obligations rising by up to 290 percent.
Implications for Property Owners and the Market
The changes to the capital gains tax framework, including the elimination of indexation benefits, present both challenges and potential benefits for investors. On one hand, the reduced LTCG tax rate of 12.5 percent could be seen as a positive development. On the other hand, without the benefit of indexation, the effective tax burden on property transactions is likely to increase considerably.
TV Mohandas Pai’s call for the Income Tax Department to explain their assumptions underscores a broader concern about the transparency and accuracy of tax policies. As property owners and investors navigate these changes, the discrepancies between projected and actual property price growth rates will continue to be a critical issue.
