How will indexation removal benefit you? I-T dept explains citing 5, 10 and 15-year old properties

To validate its point, the taxation body shared examples of properties bought 5 years, 10 years and 15 years ago. The I-T department showed how the old taxation method would lead to the taxpayers shelling out a higher amount of tax on their sales, while the new rule will save their taxes in most cases.

"Nominal real estate returns are generally in the region of 12-16% per annum, much higher than inflation. The indexation for inflation is in the region of 4-5%, depending on the period of holding. Therefore, substantial tax savings are expected for a vast majority of such taxpayers," it said.

The I-T department illustrated some cases, as shared below, to support its claim.

In the illustration above, the I-T department cited the example of an asset acquired at a cost of, say ₹100, five years ago. The tax to be paid on its sale will be lower as per the new method if the selling price is in the range of ₹175 to ₹250. A higher tax would be required to be paid only if the selling price drops to ₹170.

"For property held for 5 years, the new regime is beneficial when property has appreciated 1.7 times or more," the I-T department said.

In the above case, the I-T department showed how a property worth ₹100 may yield a return in the range of ₹240 to ₹400 in a 10-year period. The tax paid after indexation benefit removal will be lower if the selling price is in the range of ₹250 to ₹400. The tax amount will be higher as compared to the old method only if the selling price drops to ₹240.

"For property held for 10 years, the new regime is beneficial when the value has increased to 2.4 times or more," the taxation body said.

In the third example, the I-T department showed how a property acquired at a cost of ₹100 may yield a return in the range of ₹490-₹700 over a 15-year period. In such cases, the tax paid under the new method of calculation will be lower if the selling price is in the range of ₹500 to ₹700. A higher tax, as compared to the old method, will be paid only if the selling price dips to ₹490.

"From the above examples, it is clear that only where returns are low (less than about 9-11% per annum) that the earlier tax rate is beneficial but such low returns in real estate are unrealistic and rare," the taxation authority said.