The real estate sector has garnered considerable focus in the Budget 2024 due to the various tax restructuring measures announced by the government, with a particular emphasis on affordable housing. Finance Minister Nirmala Sitharaman has introduced significant tax reforms aimed at simplifying the tax structure, reducing compliance burdens, and expanding the tax base, which are expected to have a direct and indirect impact on real estate transactions and growth in the current financial year. These reforms are designed to provide relief to salaried individuals under the new regime, as well as pensioners, while also prioritizing overall economic growth and employment opportunities.

Let’s understand what is in it for real estate buyers in India!

More Money in Your Hands?

If you fall into the lower tax brackets, you will have more money at your disposal due to the simplified tax system and increased tax brackets for mid-range taxpayers. However, those in the 30% tax bracket will not see much benefit under the new regime. Individuals with higher disposable income may consider investing in real estate and taking advantage of potential lower interest rates on home loans, which could occur in the near future as rate cuts are anticipated in India.

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What has Real Estate got?

* PMAY 2.0 Urban Housing Initiatives: The budget has prioritized affordable housing, with Rs 10 lakh crore allocated for the Pradhan Mantri Awas Yojana (PMAY) Urban 2.0 to cater to the housing requirements of 1 crore urban poor and middle-class families in the next five years.Central assistance of Rs 2.2 lakh crore will also be provided over the next 5 years to bolster this initiative. Additionally, the government plans to construct three crore additional houses in rural and urban areas.

* Stamp Duty Reduction: In the budget, the finance minister urged the state governments to reduce the stamp duty for all and lower it for women buyers. If the initiative gets implemented, it will be a big relief for home buyers who pay higher stamp duty mostly in the range of 6-7% and higher in some states. It will also encourage women borrowers to buy properties in their name.

* Credit-Linked Subsidy Scheme: An earmarked Rs 4,000 crore for the credit-linked subsidy scheme within PMAY-U is set to enable accessible loans for economically disadvantaged sections, low-income groups, and middle-income groups.

Removal of Indexation Benefit on Property Transactions

An important modification includes the removal of the indexation benefit for the sale of non-financial assets, like real estate. In an effort to streamline real estate transactions, the indexation clause for real estate assets has been scrapped, and the long-term capital gains (LTCG) tax rate has been slashed from 20% to 12.5%. While this adjustment is intended to simplify the tax process, it could result in a greater effective tax burden on LTCG for property owners, particularly those with properties held for more than five years. The elimination of the indexation benefit, despite the reduced LTCG rate, might increase the tax burden on real estate transactions.

An investment in real estate is classified as long-term if the property is held for a period exceeding two years. In the past, when determining long-term capital gains from the sale of such property, it was possible to adjust the property’s acquisition cost using the Cost Inflation Index (CII). This adjustment served to reduce the taxable long-term capital gains.

Adhil Shetty, CEO of Bankbazaar.com says, “By eliminating the indexation benefits, the government has countered the consequences by reducing the LTCG tax rate from 20% to 12.5%. The indexation benefit allowed property owners to receive inflation-adjusted benefits when calculating their capital gains, but that is no longer the case. The impact of this adjustment will vary depending on how long you have owned the asset. It is now essential to take into account the new taxation when considering real estate investment as a long-term asset.”

Explaining further, CA Naveen Wadhwa, Vice-President, Taxmann, says the intention behind withdrawing indexation benefits in return for a reduced tax rate was to bring simplification in the taxation laws. However, this change may result in gains for some taxpayers and losses for others, depending on the increase in property prices.

“Since 2001, which is the base year for indexation, the Cost Inflation Index (CII) has increased at a median rate of 5%, with an average increase of 5.80%. If a property’s price has grown at a CAGR of 9.47% since 2001 and it is sold on or after 23rd July 2024, the tax liability will be lower than it would have been after the indexation benefit,” informs Wadhwa.

However, if the property’s price experiences an annual growth rate of less than 9% – which happens in most cases – then it is highly likely that the new regulation will steer you towards a disadvantageous position.

Thus, the Budget 2024 provides a comprehensive approach to increase more supply for affordable housing and address the housing needs of the urban poor and middle-class families. While real estate may see higher growth due to increase in consumption, the tax burden may make it less lucrative for long-term investment.

Thankfully, as the government has clarified, rollover benefits still continue as capital gains up to Rs 10 crore, if reinvested, will not attract any capital gains tax. However, if you are selling a house not for reinvestment but for profit, then you need to weigh all the options carefully – especially if the house has been bought in 2001 or after. For a piece of property bought or inherited before 2001, however, the indexation benefit has been retained.