The real estate sector has raised concerns about the government’s proposal to eliminate indexation benefits for long-term capital gains in real estate, warning that it could hamper growth in the sector. The Budget 2024-25 suggests a flat 12.5 per cent tax on capital gains from property sales without indexation benefits, which could significantly impact owners holding assets for more than ten years. This includes heritage home owners, who may face higher tax burdens due to the inability to adjust the property’s cost basis for inflation.
Developers argue that the change could result in higher taxes for those selling long-held assets. However, the Income Tax Department disputes this, suggesting that nominal real estate returns, typically ranging from 12-16 per cent per annum, are much higher than the 4-5 per cent inflation rate. Therefore, they argue that individuals will not face higher taxes on profits from property sales. Despite this, real estate experts contest the department’s stance, noting that in some cases, returns on long-term property investments fall below the inflation rate. This discrepancy raises concerns about the proposed tax changes. An expert from Residential Services, India, JLL, highlighted that removing the indexation benefit could deter sellers in the secondary market due to increased taxable capital gains, despite a reduced Long Term Capital Gains (LTCG) tax rate.
The industry, however, maintains a cautiously optimistic outlook. Industry leaders believe that new investors holding properties for more than two years may benefit from the lower long-term capital gains tax, potentially making short- and mid-term investments more attractive. The growth factors, bullish economy, and simplified tax structure suggest that in cases of higher capital appreciation, the new regime could be advantageous.
The Income Tax Department also emphasises the benefits of a simplified tax structure, which include ease of compliance in computing taxes, filing, and maintaining records. The new proposal removes differential tax rates for various asset classes, aiming to streamline the tax system and enhance overall compliance. The real estate sector continues to monitor the potential impacts of these changes, advocating for adjustments that consider the diverse returns on long-term property investments while promoting a conducive environment for growth and investment.
