The removal of indexation benefit for assets including real estate is expected to increase tax outgo for sellers, depending on when the property was bought.
The finance minister reduced the long-term capital gains tax on sale of assets from 20% to 12.5% but removed the indexation benefit for buyers. Later, she clarified that properties held before 2001 will continue to get the benefit, which allows property owners to adjust their gains for inflation.
While developers said the move would not have any major impact, rating firms and advocates felt the move would hurt the real estate market.
“Selling a 20-year-old property will be problematic over selling a property that is five years old,” said Niranjan Hiranandani, managing director at Hiranandani group.
Sunil Pareek, executive director at Assetz Property group, said the new regime is beneficial for anyone who has made a significantly higher profit over medium- to long-term inflation in property.
“The removal of indexation benefits may hurt sellers. While we must appreciate the overall intent to simplify taxation, such a change may particularly hurt individual sellers or middle-class sellers who had invested in real estate with the intention of eventually benefitting from market value rising. This may overall reduce the demand for residential real estate projects,” said Archana Tewary, partner at JSA Advocates and Solicitors.
The finance minister’s move to reduce the holding period for assets, including real estate, to two years from three years for calculation of long-term capital gains tax is beneficial for buyers, developers said.
Investments in growth corridors for a holding period of more than 24 months will become relatively beneficial from a tax perspective, Pareek of Assetz group said.
“Buyers now need to hold on to assets for just two years to enjoy long-term capital gains,” Hiranandani said.
Experts said the FM reducing holding period for calculation of long-term capital gains for REIT and InvIT investors from 36 months to 12 months, making them on a par with listed shares, will also benefit the instruments.
“This move will further enhance the attractiveness of the product, increasing investor participation,” said Aravind Maiya, chief executive at Embassy REIT.
The FM also announced that the government will build 30 million houses under the Pradhan Mantri Awas Yojana. She said they will encourage states charging higher stamp duty to moderate rates, and also consider reducing stamp duty for women buyers.