The recent budget changes have removed indexation benefits on real estate, highlighting a crucial point: we cannot ignore inflation when discussing taxation. Indexation is logically right because it adjusts for inflation, ensuring that people are not taxed on illusory gains. Without it, the government seems to be taxing individuals unfairly, even when they haven’t made real profits.

Understanding Inflation and Real Estate Prices

Consider someone who buys a property, and its value only increases with inflation. For example, if inflation has averaged 6-7% over the past 20 years, the property value would have increased by the same rate. However, many real estate properties don’t even meet this inflation rate. With the new taxation rules, the 12.5% tax is essentially applied to the inflationary increase, not real gains. This means that despite no real profit, the owner still faces a significant tax burden.

The Money Illusion and Its Consequences

This situation creates a “money illusion.” Imagine buying something for Rs.100 last year, and due to 6% inflation, it sells for Rs.112 in two years. In real terms, you haven’t made any money because the buying power of Rs.100 two years ago is the same as Rs.112 now. Yet, the government taxes the Rs.12 increase at 12.5%, even though there is no real profit. This taxation on inflation is essentially forcing citizens to pay taxes on money they haven’t genuinely earned.

Governments and Inflation

Governments worldwide often print money, leading to inflation. Despite claiming to control inflation, they actually benefit from higher inflation because it increases their tax revenue. This practice is akin to looting money from savers and investors, as they are taxed even without making real returns. It’s crucial for citizens to understand this concept and realize how they are being affected.

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