The new capital gains taxation introduced in Budget 2024-25 does seem negative for the real estate sector and its buyers. Hopefully, other budgetary announcements for the taxpayers & the realty sector, may subdue its adverse impact.
WHAT IS INDEXATION?
Indexation adjusts the purchase price of an asset for inflation, reducing the profits and tax liabilities accordingly. Without this adjustment, taxpayers face increased taxes despite the lower LTCG rate due to increase profits, regardless of inflation eating in the said profits.
THE NEW TAX RULES
“With the rationalization of rate to 12.5%, indexation available under second proviso to Section 48 is proposed to be removed for calculation of any long-term capital gains, which is presently available
for property, gold and other unlisted assets. This will ease computation of capital gains for the taxpayer and the tax administration,” the budget document stated.
In simpler words, the Long-Term Capital Gains Tax (LTCG) on property sales has been reduced from 20% to 12.5%, but the indexation benefit for properties purchased after 2001 estate has been revoked.
FINANCE MINISTERY’S POINT OF VIEW
As per Finance Secretary TV Somanathan the real rate of return in real estate typically ranges from 6-16% and taxation change is ex- pected to benefit the middle class by simplifying the tax approach.
According to Union Finance Minister Nirmala Sitharaman statement, it will lead to an overall reduction in average taxation. “The average taxation has come down. When we say it is 12.5%, it is because we have calculated it for each of the different classes. We have brought it down to 12.5%, which is the lowest in several years, encouraging investment in the market,” she said.
CITIZEN’S CONCERNS
The removal of indexation benefits has led to concerns about higher tax liabilities among people and also, that it will lead to black money and cash transactions in real estate. reduced profitability from real estate transactions. Many believe that investors will potentially move away from real estate, being a heavily taxed asset. Moreover, there will be undervaluation of property deals, and non-disclosure of the real value of the property.
Other apprehensions pointed out are that, removing indexation will demotivate the investors, hampering the housing sector growth on the other hand, buying homes will no longer be a lucrative option for average Indians, that always look at upgrading to bigger homes as the families or incomes grow, because individuals selling old properties will incur higher tax outgo.
THE POSITIVES & THE NEGATIVES
Hearing both the side, now comes the biggest question. Are the new changes to capital gain taxation good for real estate sector or will it adversely impact average property buyers?
Let’s hear the good news first
Some experts point out that this policy change targets the speculative investment in real estate. By removing indexation for property investments, the government aims to discourage speculative buying, wherein investors hold on to the properties for long time to gain from appreciation. This not only inflates the home prices but also contributes to housing shortages. Most of the middle-class Indians buy homes for self-use and such a move will restrict property flipping, leading to a more stable and equitable housing market. According to global brokerage firm CLSA the new tax regime would be neutral or marginally beneficial for investments with longer holding periods (over 10 years) and where property price appreciation exceeds 10% per annum. Additionally, there will be no impact on super-luxury apartments with ticket sizes over`10 crore since last year’s budget capped the indexed cost of acquisition at `10 crore.
As per realty consultants, those moving from one house to another are not affected by the change, as long as the capital gains do not exceed the cap of `10 crore intro- duced last year and can apply to two properties owned by an individual. Which means, the new tax regime is favorable to luxury property buyers.
Now comes the bad news
Home buyers with a holding period of less than 5 years, where property price appreciation is moderate (less than 10% per annum) are the ones that will be negatively impact- ed as the tax liability will increase.Another impact of the removal of indexation for the middle-class homebuyers who plan to upgrade or move to new house will be that because of higher tax deduction, they will have to invest more to buy their new home.
As the new provisions will increase the amount of capital gains (given there’s no indexation benefit), this would mean that those who intend to invest capital gains in a new house for availing the rollover benefits under Section 54 or section 54F of the IT Act would now be required to invest more money to avail the benefit.
Also, for the investors who hold on to property for a long time to reap the benefit of price appreciation or invest in early stages of the project at lesser price and sell at higher price when the project is complete or near completion, the new taxation rules now, make such investments unattractive.
The tax consultants are of the opinion that if the price of the long-held property has increased in line with inflation, the current provisions of reduced tax and no indexation will not be beneficial for the property owner. In contrast, the sale of newly acquired properties will benefit from new tax proposal as the indexation benefit will be marginal.
WHAT THE EXPERTS SAY
Anshul Jain, Chief Executive – India, Cushman & Wakefield, highlighted that while the LTCG rate reduction aligns with the government’s focus on tax simplification, the re- moval of indexation could impact investment demand for residential units in the short term.
Sharing his perspective, Sachin Bhandari, Executive Director and CEO, VTP Realty commented, “De- velopers heavily reliant on investors will be adversely affected by the government’s decision to rationalize the Long-Term Capital Gains (LTCG) tax, reducing it from 20 percent to
12.5 percent. However, the elimination of the indexation benefit when applying LTCG means the overall tax outflow will be higher under this new regime. This move is likely to dampen investor sentiment, removing key incentives and directly impacting developers dependent on investors.”
Dhruv Agarwala, Group CEO of Housing.com and PropTiger.com, sees the removal of the indexation benefit, increasing the tax burden on real estate transactions. Despite the reduction in the LTCG tax rate, he believes the changes could lead to higher taxes for property sellers.
Anupama Reddy, Vice President & Co-Group Head – Corporate Ratings, ICRA Ltd agreed, “Considering the long-term returns on the resi- dential real estate sector, despite a reduction in the long-term capital gains tax rate, the removal of indexation benefit at the time of sale of property is likely result in a higher tax outgo. Hence, this is a negative for the sector.”
Pankaj Kumar, VP – Fundamental Research, Kotak Securities shared, “The Union Budget-FY25 has rationalized long-term capital gains tax on real estate transaction. It proposed to remove indexation benefits and reduce the long-term capital gains tax rate from 20% to 12.5% with immediate effect (grand- fathering for properties held before 2001). We find that the new capital gains tax structure for real estate favours investors, who have generated high IRRs, while investors with poor IRRs would be worse off in the new regime. On the other hand, it is expected to have limited impact on end users who purchase homes for personal consumption.”
“On the taxation front, the reduction in long-term capital gains tax on real estate property from 20% to 12.5% is a positive. However, the removal of the indexation benefit is largely negative for all those planning to sell their old properties. Also, changes in the personal tax regime, such as increase in the standard deduction from Rs 50,000 to Rs 75,000 and changes in tax slabs, would put more disposable income in the hands of the salaried, which is likely to boost the affordability of homebuyers,” notes Aniket Dani, Director- Research, CRISIL Market Intelligence and Analytics.
REALTY+ ANALYSIS
The first impression one gets from the policy shift in capital gain taxation regime is that it is good for short-term investors but not long-term investors. Secondly, the removal of indexation has made real estate less tax-efficient. Lastly, even after reduction in the long-term capital gains tax on real estate, property sellers would still end up paying higher tax without the benefit of indexation, or adjusting for inflation. Therefore, you may be better off if property price rise is much higher than inflation.
The results that we might see is that of spur in cash transactions, waning investor interest in real estate, investors favoring sort-term flips to benefit from the lower LTCG rate, potentially affecting the long- term growth of the sector and Millennials once again preferring paying rent over investing in properties.
Most of the middle- class Indians buy homes for self-use and such a move will restrict property flipping, leading to a more stable and equitable housing market.
TOP 10 EFFECTS
- Indexation benefit is revoked for properties purchased after 2001
- The policy shift is good for short-term investors but not long-term investors.
- The policy change may end speculative investment in real estate.
- Removal of indexation has made real estate less tax-ef- ficient
- Significant rise in the tax burden of property sellers
- New tax regime benefits if property price rise is much higher than inflation
- Spur in cash transactions may follow
- Minimizing of viability of real estate as an investment class
- The move could slow down real estate growth
- End-user driven real estate markets will be least impacted and investor driven realty markets will be most adversely affected
