The real estate market in India has been booming. Between January-June 2024, housing sales hit a 11-year high of 1.73 lakh units. While many of the buyers may have been first timers or those moving to larger, more premium homes, real estate has also typically been one of the favourite investment avenues for Indians. The Union budget for 2024-25 announced by Finance Minister Nirmala Sitharaman has some negative surprise in store, especially for the real estate investors.
As a part of its plans to simplify capital gains taxation, the budget proposed an increase in short-term as well as long-term capital gains tax (LTCG), while also bringing in uniformity.
Long-term capital gains on financial as well as non-financial assets will now attract a tax of 12.5 per cent. For equity investors, it’s a 2.5 per cent increase. But, for real estate, it’s actually a 7.5 per cent decline from earlier 20 per cent. So, how is it a negative surprise for real estate investors, you ask?
Well, earlier, real estate investors enjoyed indexation benefits, while calculating capital gains. Essentially, if you bought a house for Rs 50 lakh and were now selling it for Rs 1
crore, you could adjust the purchase price to the cost inflation index of the income tax department. It would then typically attract capital gains. Not any more as the gains will now be directly calculated by calculating the difference between the purchase and sale price. If your property is really old, then it could really pinch a lot.
"Though long term capital gains has been unified across all asset classes, there is a huge impact on unlisted securities and real estate on account of removal of indexation benefit.
Overall, tax costs will substantially rise as this benefit is now denied," pointed Diana Mathias, partner at Cignas.
Dhruv Chopra, managing partner at Dewan PN Chopra & Co noted that while the rate of tax had reduced by 7.5 per cent, for immovable properties with long holding period, the potential
tax outflows may be higher under the new tax provisions, subject to facts.
Vaibhav Gupta, partner at Dhruva Advisors, also felt removal of cost indexation on all assets was a significant change that would affect real estate returns in a big way. At the same time, however, he opined that the reduction of the holding period to two years for LTCG would be a big positive.
Niranjan Hiranandani, chairman of Hiranandani Group and NAREDCO (National Real Estate Development Council) was also happy that the LTCG holding period had now been brought in line with that of equity.
"Aligning the holding period for long term capital gains with that of equity shares by reducing it to 24 months will significantly boost much needed investment and enhance competitiveness within the sector," he said.
However, Hiranandani too felt that the reduction in LTCG tax without indexation benefits would have to be closely monitored for its practical impact.
For individual tax payers, under the new tax regime, the increased standard deduction limit to Rs 75,000 from Rs 50,000 along with new income tax slabs implied savings, but "hardly
enough to boost housing demand," pointed Anuj Puri, chairman of Anarock Group.
Not surprisingly, real estate stocks saw a huge selling pressure on Tuesday. While the broader Sensex and Nifty50 ended only marginally lower, the BSE Realty index tumbled 2.15 per cent.
DLF, Godrej Properties, Oberoi Realty, Macrotech, Brigade and Suntech, all declined between 2.5 per cent to over 4 per cent.
