Capital Gain Tax Changes Create Impact on Real Estate Sector
New Tax Rules Seek to Discourage Speculative Buying
The introduction of the new capital gain taxation in the Budget 2024-25 has created mixed reactions in the real estate sector. While the reduction in the Long-Term Capital Gains Tax (LTCG) rate from 20% to 12.5% may seem positive, the removal of indexation benefits for properties purchased after 2001 has raised concerns among investors.
Indexation, the adjustment of the purchase price for inflation, lowers the tax liability, but its removal means that taxpayers face higher taxes even with the lower tax rate. The government aims to simplify tax computation and administration with this change. Union Finance Minister Nirmala Sitharaman argues that the average taxation has come down and the move encourages investment in the market.
However, citizens have expressed concerns about the higher tax liabilities resulting from the removal of indexation. Some fear it may lead to an influx of black money and cash transactions in the real estate market. Moreover, reducing profitability from real estate transactions may cause investors to move away from the sector. Additionally, the non-disclosure of the real value of the property and undervaluation of deals are potential repercussions.
Effects on Different Investor Groups
The impact of the new tax rules depends on the investor group. Investors who hold properties for a longer time and with significant price appreciation exceeding 10% per annum may find the new regime neutral or marginally beneficial. Super-luxury apartments with large ticket sizes over ₹10 crore remain unaffected.
On the other hand, individuals with a holding period of less than 5 years and moderate price appreciation less than 10% per annum will face increased tax liability. Upgrading or moving to a new house will require more investment due to higher tax deductions. Long-held properties that have seen an increase in value in line with inflation will not benefit from the reduced tax and no indexation.
Expert Opinions
Experts in the real estate industry have offered varying opinions on the impact of the new tax rules.
Anshul Jain, Chief Executive-India at Cushman & Wakefield, suggests that the removal of indexation could negatively affect the demand for residential units in the short term. Sachin Bhandari, CEO of VTP Realty, highlights that developers heavily reliant on investors may be adversely affected by the change, leading to dampened investor sentiment and impacting the developers directly.
Dhruv Agarwala, Group CEO of Housing.com and PropTiger.com, believes that the removal of the indexation benefit will increase the tax burden on real estate transactions, potentially resulting in higher taxes for property sellers. Anupama Reddy, Vice President & Co-Group Head of Corporate Ratings at ICRA Ltd, notes that despite the reduced LTCG tax rate, the removal of indexation will lead to a higher tax outgo and is a negative for the sector.
Pankaj Kumar, VP-Fundamental Research at Kotak Securities, asserts that the new taxation structure favors investors with high Internal Rate of Returns (IRR) but negatively affects investors with poor IRR. He mentions that end-users purchasing homes for personal consumption will see limited impact.
Conclusion
The new capital gain tax changes in the real estate sector have their positives and negatives. While it may discourage speculative buying and ensure a more stable housing market, the removal of indexation benefits has made real estate less tax-efficient. Investors with properties acquired after 2001 will experience higher tax liabilities. The impact will vary depending on the holding period, price appreciation, and investment strategy.
The removal of indexation and the overall tax liabilities will affect investor sentiment, potentially reducing real estate investments. Cash transactions may increase as an unintended consequence. Nevertheless, end-user-driven real estate markets are unlikely to be significantly impacted.
It remains to be seen how these changes in taxation will unfold and what implications they will have for the real estate sector in the long run.
