Budget 2024: Will eliminating indexation increase the cash component in realty sector?

Real estate market is likely to be hit hard after the Union Finance Minister Nirmala Sitharaman proposed to eliminate indexation benefits while calculating the long-term capital gain (LTCG) tax on real estate. The new norms are applicable from immediate effect, that is from July 23, 2024.
 

The Finance Minister announced plans to change the LTCG rate to 12.5 per cent across all financial and non-financial assets to rationalise the capital gains tax regime. This would result in the LTCG tax on property (real estate sector) falling from 20 per cent earlier.
 

The indexation benefit adds the inflation rate to the asset’s purchase price. At the time of the sale of the asset, this means a higher purchase price, resulting in a lower capital gain, which may be zero in some cases, resulting in a tax benefit for the seller. Without indexation, the gain would be calculated on the actual purchase price, potentially resulting in a higher tax outgo on a flat rate.
 

The move to do away with the indexation benefit from the real estate sector is seen as a negative from the market experts who believe that it may discourage investment in the real estate sector and increase the flow of cash component, thanks to the higher tax outgo for the sellers.
 

It appears to be a dampener for the real estate sector, particularly for the middle class, which usually channelise their savings into real estate and indexation was the only provision providing them a cushion against the capital gain tax. With the indexation benefits done away, they will end up paying tax on their household savings (represented by real estate), said Amit Singhania, Managing Partner at Areete Law Offices.
 

"The move may also disincentive the Sellers to get the registration of the property at higher than stamp duty rate. Though, the Buyers of the property may insist for registration at higher rate than stamp duty, if the Buyer is availing housing loan. If it is a Sellers market then, there is a possibility of regeneration of cash in the economy in real estate transaction," he explained.
 

Though long term capital gains has been unified across all asset classes, there is a huge impact on real estate on account of removal of indexation benefit, said Diana Mathias, Partner, Cignas, who echoed the similar view. "Overall tax costs will substantially rise as this benefit is now denied," she added.
 

The rate of tax has reduced by 7.5 per cent but for immovable properties with long holding period, the potential tax outflows may be higher under the new tax provisions, subject to facts, said Dhruv Chopra, Managing Partner at Dewan PN Chopra & Co. "Overall, the intent of our FM is to simplify the tax regime and reduce litigation, which intent is well appreciated," he said.
 

Contrary to this, some experts see this a positive move. Bringing down the long-term capital gains tax to 12.5 per cent is a welcome step, even if it comes with removal of indexation benefits. This will encourage more liquidity in property transactions, said Amit Goyal, Managing Director, India Sotheby's International Realty.
 

"Higher uniformity in long term capital gains tax across different asset classes was a long standing task of investors. The push for digitization, efficient land management, and modernized bylaws is also a boost for urbanisation and real estate. This will improve ease of property transactions and strengthen municipal finances through increased property taxes," he said.