It wasn’t the biggest provision in the Budget. But it’s the item that has set alarm bells ringing the loudest. “The middle class is very angry and upset,” says venture capitalist Mohandas Pai, who’s usually a strong backer of Prime Minister Narendra Modi’s government.

The former Infosys director is talking about the removal of what are called indexation benefits which are offered to taxpayers to offset inflation effects on assets like real estate, gold, unlisted shares, art and even debt mutual funds. And Pai is just one of a long list of critics.

The income tax department quickly picked up on the public alarm, issuing a statement insisting the new rules would benefit the investing public. Then finance secretary T.V. Somanathan went on TV to explain why the new system was better than the old one but convinced no one.

The grouses began to pile up in earnest as investors and accountants started to figure out how the new changes would work. It was swiftly clear – and even Prime Minister Modi’s government admitted – that investors whose capital gains had soared would benefit from the new changes. On the other hand, people who had made slow-moving investments would lose quite substantially.

To put that more precisely, investors who have raked in a more than 11 per cent return will benefit from the new changes. Anyone whose investments have reaped less will lose. Says Siddarth Pai, founding partner, 3one4 Capital: “The threshold rate of return for the new regime to be more beneficial for you, compared to the old regime, is an 11 per cent gain.”

That’s because what the government’s done is removed indexation benefits from long-term capital gains but reduced the tax rate by 37.5 per cent from 20 per cent to 12.5 per cent.

The new changes could hurt many investors who have put their faith in real estate and gold. Contrary to general impressions, both of these assets don’t bring in terrifically high returns – unless you happen to have brought the right plot of land at the very right moment.

Pai points out that the Reserve Bank of India’s latest Housing Price Index figures show that property has barely risen by about 4.5 per cent to 5 per cent over 10 years. “So, the rises have been barely keeping up with inflation,” he says, adding: “Obviously the new tax regime ends up hitting these hard because they will end up paying dramatically more tax due to the indexation loss.”

The slow movement of house prices is confirmed by all the top real estate players. Even in the seven top metros, Anarock Research calculates that prices per square foot rose just 1 per cent between 2018 and 2019 and didn’t rise at all between 2019 and 2020. In 2021, there was an anaemic 2 per cent increase and, looking slightly better in 2022, prices were up by 5 per cent. That picture is changing now and in 2023 prices increased by 11 per cent. Similarly, Colliers India reckons price rises have averaged about 9 per cent in the last three years in the major metros.

It’s much the same story with gold even though many who watch prices occasionally soaring may think differently. Says Siddarth Pai: “Gold prices keep increasing but if you take the overall trend, the maths shows that it’s just about a 9.92 per cent increase over a 10-year timeframe. This is below the over 11 per cent required for the new regime to be beneficial.”

For holders of debt mutual funds the latest changes in the capital gains tax rules are particularly brutal. Here too the same rules are being applied: 20 per cent taxation with indexation is being changed to 12 per cent tax without indexation for investments made before April 1, 2023.

But this change will result in debt mutual fund holders paying 40 per cent extra tax. This obviously means big losses for investors and also has the effect of throwing all financial planning completely out of the nearest window.

The Association of Mutual Funds of India (AMFI) is, unsurprisingly, begging the government to make a string of changes to the new proposals including bringing back indexation.

It predicts that investors may start looking at equity mutual funds which still get favourable tax treatment. It’s thought that fewer people will now invest in debt funds. Also, the industry points out that the new tax changes have created uncertainty in the minds of investors. Some analysts suspect that the government is trying to push money from debt mutual funds back into bank deposits which have been falling lately.

The idea of indexation, quite simply, is to offset the sharp impact that inflation can have on an investor’s portfolio. But administering it can lead to complex calculations that the government is keen to get rid of. Says tax consultant and jurist, Abhishek A. Rastogi: “Scrutiny of returns happens because the department wants to assess whether the indexation benefit is correctly applied. Which rate, which year of acquisition, the cost of acquisition. Basically, they have removed all those complexities of computation. From that point of view it is a good move.”

Are the current changes the best way forward? The finance ministry insists that it has come up with the most workable solution for as many people as possible – and it doesn’t look willing to change course.

But Siddarth Pai reckons there could be a better way forward using a solution that has been used in the past.

That’s called ‘grandfathering’ and it means, quite simply, that investments made before the new policy came into force will be excluded from the new tax rules. Says Pai: “Nobody's arguing the fact that the lower rate is better. They are angry that indexation has gone. So if you give them indexation and you give them the lower rate they will be extremely happy. The number of losers if you give them indexation ends up dramatically reducing.”

One fear with real estate transactions is that if capital gains tax bills rise sharply it will lead to more black money deals. But Rastogi insists that isn’t necessarily true: “The question which will remain is whether there will be a greater generation of black money etc. I think it will all depend on how maturely they fix the circle rates.” The circle rates are the minimum prices for property in a certain area.

Will the finance ministry tweak the changes it has made to capital gains tax? It certainly seems iniquitous to enforce a system that effectively penalises people who’ve made poor profits and, apparently, rewards others who’ve made bumper returns. The tax collector may argue that this is a question to which he or she is indifferent. But it does appear to offend the laws of natural justice. There’s still time to make tweaks to the Budget and this would appear to be a legitimate candidate for alteration.