How Has the Removal of Indexation of Capital Gains Transformed Mumbai’s Real Estate?

By Lodha

A home is more than just four walls that provide shelter—it is a space where you build your life and an asset to your portfolio. Whether you are a homeowner looking to upgrade to a better space or an avid real estate investor, it is important to stay abreast of policy changes and how they affect the market. Ever since the Union Budget FY24-25 was announced, there has been plenty of buzz around indexation and what the lack of it will do to Mumbai’s real estate market. Here is an easy explainer to help you understand exactly what indexation is, what changes the budget has brought about, and how it will impact Mumbai’s real estate landscape.

What is Indexation?

Indexation allows a person selling property to adjust the purchase price of the space according to inflation. Doing so helps the seller reduce taxable profits and tax liabilities. Without indexation, property sellers paying tax may have to pay more while filing their returns despite the lower Long-Term Capital Gains Tax rates.

In 2024, Finance Minister Nirmala Sitharaman presented the Union Budget for FY24-25 and stated that indexation will no longer apply to the sale of property. Instead, she announced that Long-Term Capital Gains Tax on such a sale would be cut down from 20% to 12.5%. Here is the difference between the tax liability of property sellers without and with indexation:

12.5% without indexation: This option helps property sellers enjoy a lower tax rate of 12.5% on the capital gains earned from the sale. However, the original purchase price of the property has not been adjusted for inflation.

20% rate with indexation: The traditional route allows property sellers to adjust the purchase price for inflation. However, they must pay taxes at a higher rate of 20%. The purchase price is adjusted for inflation according to the Cost Inflation Index (CII) provided by the Central Board of Direct Taxes.

How will the Removal of Indexation Affect Mumbai’s Real Estate Market?

On the one hand, real estate experts are anticipating the removal of the indexation benefits to result in a dip in sales in Mumbai’s resale market. Experts state that resale transactions in Mumbai and other metro cities might be affected by the removal of indexation, specifically in the mid-segment market (range of ₹2 to ₹5 crore). Real estate investors might refrain from selling property and will wait before exiting the market. Industry insiders also believe that investors buying homes will hold off on getting involved in real estate transactions for a few months following the budget. The real impact of the removal of indexation will be visible over six to nine months of the budget.

However, this dip in resale is also contingent on individual investment goals. Similarly, other experts believe that the effect of the removal of indexation is also dependent on how the stock market fares in the next few months.

On average, Mumbai’s real estate market has reported more than 10,000 property registrations per month. Out of this sum, 80% falls under the residential segment. Experts believe that a significant portion of residential purchases are a result of homeowners upgrading their space after the pandemic and opting for luxury apartments in Mumbai. Real estate researchers believe that any changes to Mumbai’s real estate market due to the removal of indexation are likely to be temporary. Eventually, after a short-term adjustment period, the market will normalise and adapt to the new conditions. Additionally, if a property’s rate has risen more than the inflation rate, a tax rate of 12.5% will prove to be more favourable for sellers as opposed to the indexed 20%.

Analysts at the CLSA (Credit Lyonnais Securities Asia) are of the opinion that the change in indexation policy is unlikely to impact end-users who plan on selling property and reinvesting the gains in real estate, like luxury flats for sale in Mumbai. However, it will influence sellers planning to invest the gains from the sale in other asset classes.

If you are a seller looking to make the most of the lack of indexation, you can reinvest the gains from the sale into another residential property. When you think of impeccable construction quality, world-class hospitality, and homes created by the top interior designers in India, only one name comes to mind: Lodha - one of the top builders in Mumbai. At Lodha, we have made an indelible mark on the skylines of all the major cities via our residential projects in Mumbai, Pune, Bengaluru, etc. Lodha’s foundation rests on building dream homes for our diverse clientele, from affordable and comfortable spaces to luxury apartments. If you want to make a real estate investment that will be a dream to live in and add value to your portfolio, look no further than Lodha.

At Lodha, we help you make a beautiful life in your dream home.