Union Budget 2024: What does the real estate sector expect? - Page 2

Removal of indexation benefit: Here is a list of things you need to know

• The government has clarified that the removal of indexation benefits will not be applicable to old properties held before 2001, which would continue to get indexation benefits.

• The new norms are applicable with immediate effect, ie, from July 23, 2024. This move is unlikely to impact the end-users who sell their existing house and reinvest in a new house (LTCG is not applicable).

• The impact of this new regime would be neutral/marginally beneficial for investments with longer holding period (>10 years) and where property price appreciation is at >10% p.a.

• CLSA believes markets like Bengaluru, Hyderabad and Pune, which are end-user driven markets, will be the least impacted. Markets such as NCR and Mumbai, which have higher investor activity, are likely to be adversely impacted.

• There will be no impact for super-luxury apartments.

Real estate stocks slipped in trade on Tuesday, July 23, after Finance Minister Nirmala Sitharaman, in her Budget 2024-25 speech, announced the removal of indexation benefit on sale of properties. The long term capital gains (LTCG) tax on property sale; however, has been reduced to 12.5% from 20% earlier.

The announcement dampened investor sentiment as people will now have to pay more in taxes on profit earned by selling their properties. Indexation allows the sellers to adjust inflation rate while selling their assets. Now, since the benefit is removed, they will have to shell out more.

Reacting to this, all realty stocks tumbled in Tuesday's trade. On Wednesday; however, the stocks recovered. The Nifty Realty index was trading over 0.50% higher in the afternoon deals.

Commenting on the tweaked rule, analysts at CLSA said they believe it is unlikely to impact end-users who sell their existing house and reinvest in a new house, but it will impact investors who sell their house (investment) and reinvest in other asset classes.

Credit: Upstox

Govt may soften LTCG tax blow on real estate

The government may address the concerns over the Budget proposal to revise the taxation of long-term capital gains (LTCG) from real estate transactions, by offering a few reliefs. According to sources familiar with the deliberations in this regard, it make the new LTCG regime effective from April 1 next year, instead of July 23, 2024, as proposed in the Budget. The government may also retain an option of indexation benefit in the new regime; alternatively, it could change the cut-off date for removal of indexation from April 1 2001, to a later date.

The changes could be done through an amendment to Finance Bill 2024 when it is to be taken up by the Lok Sabha this week. The government would, however, stick to the new LTCG rate of 12.5%.

Indexation is meant to adjust the gains from property sales by factoring in inflation during the period of ownership, and the cost price index is used to compute this.

In the Budget 2024-25, finance minister Nirmala Sitharaman proposed to bring down the LTCG tax rate to 12.5% from 20%, for property and other unlisted assets. However, in the proposed regime, the benefit of indexation is to be scrapped for properties that were purchased on or after April 1, 2001.

This has led to a widespread perception that the post-tax gains from property sales could come down, causing lower demand for real estate units, and fewer transactions. Government officials and independent experts have, however, pointed out that the new regime may not result in higher tax outgo for the sellers of property in all cases. If the property values appreciate at very high rates, as in many locations in metro cities, then the new regime could be more beneficial to the taxpayers, for instance.

Credit: Financial Times