From Indexation to Exemptions: The big tax changes for real estate in 2025

The Income Tax Bill 2025 has introduced sweeping changes to capital gains taxation, fundamentally altering how real estate investors structure their transactions. With India’s real estate market projected to contribute 13% to the GDP by 2030, these tax reforms are poised to have significant consequences for both individual property owners and institutional investors.

The revised tax provisions have been framed to enhance compliance, curb tax avoidance, and bring more transparency into the system. However, industry experts believe these changes could also create fresh challenges, particularly for those with long-term investments. One of the most notable revisions is the removal of indexation benefits for properties acquired after July 23, 2024, a move that will likely result in higher taxable gains despite a reduced tax rate of 12.5%.

Avneesh Sood, Director of Eros Group, sees this as a major shift for the industry, stating, “The removal of indexation benefits will force investors to rethink their long-term holding strategies. While a lower tax rate of 12.5% might seem beneficial at first glance, without inflation adjustments, the actual tax outgo could be much higher than before. Investors will now have to explore more structured tax planning to ensure profitability.”

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The capital gains exemption cap of Rs 10 crore per transaction is another significant change that will affect high-value property sales. Previously, investors could reinvest unlimited capital gains into another residential property to claim tax exemptions under Section 54. Now, any gains exceeding Rs 10 crore will be taxed, limiting reinvestment options for high net-worth individuals (HNIs) and large-scale investors.

Another key change relates to Joint Development Agreements (JDAs), where the taxation timeline has been revised. Under previous regulations, capital gains were taxed at the time of signing the agreement. The new bill defers taxation to the year when the completion certificate is issued, aligning tax liability with actual revenue realization for landowners. This is expected to ease cash flow burdens for developers but could also lead to delays in project planning and structuring.

Residential real estate investors are expected to be among the most impacted by these tax amendments. The tax treatment of multiple properties has changed significantly, restricting capital gains exemptions to only one reinvestment per transaction. This means investors who typically diversify their capital gains across multiple properties will no longer enjoy the same tax relief as before.

Adding to these changes, rental taxation has also been revised. Under the new bill, vacant properties will be taxed based on their expected rental value rather than the actual rent received. This move, aimed at increasing revenue from idle properties, could lead to higher tax outflows for landlords, particularly in slower-moving markets where rental demand fluctuates.

Commercial real estate investors and REITs (Real Estate Investment Trusts) have not been spared from these revisions either. REITs, which collectively hold over Rs 4.7 trillion worth of commercial assets in India, now face capital gains taxation at 12.5% without indexation. This could lead to reduced investor returns and a reassessment of investment strategies in commercial spaces.

For direct commercial property owners, the lack of indexation will increase the effective tax on long-term capital gains, especially for assets held for decades. As a result, investors may now prefer shorter holding periods, selling before inflation significantly impacts their taxable gains.

Developers, however, have received some relief in the form of a two-year tax waiver on unsold inventory. This applies to both residential and commercial units, allowing developers to hold completed projects for up to two years before the tax liability kicks in.

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Sood emphasizes the broader implications of these changes, saying, “For developers, the two-year tax relief on unsold inventory is a welcome move as it provides a buffer against market fluctuations. However, individual investors and landlords must now adopt more sophisticated tax planning strategies. The changes in rental taxation and capital gains exemption limits could fundamentally alter how people invest in real estate.”

In response to these tax changes, real estate investors will need to rethink their financial strategies. Those holding properties purchased before July 23, 2024 may consider selling before April 1, 2026, to take advantage of indexation under the old tax regime.

Alternative investment avenues such as capital gain bonds under Section 54EC—which now have an increased investment cap of Rs 50 lakh per financial year—could also become more attractive for investors looking to reduce their taxable gains.

For high net-worth individuals, REITs present an alternative tax-efficient option. While capital gains on REIT unit sales remain taxable, dividend income under specific conditions is tax-exempt, making them a compelling choice for diversified real estate portfolios.

Another area that investors may explore is fractional ownership in commercial properties, which allows multiple stakeholders to co-own high-value assets while spreading tax liability across investors. This model is already gaining traction in India’s real estate market and could become an even more attractive option under the new tax structure.

The new tax framework also offers a strategic advantage for investors using Joint Development Agreements (JDAs). Since capital gains taxation has been shifted to project completion rather than agreement execution, landowners can now delay their tax outflows, creating more flexibility in project financing.

Overall, the Income Tax Bill 2025 represents a major shift in India’s real estate tax landscape. The removal of indexation benefits, new reinvestment restrictions, and revised taxation timelines present both challenges and opportunities for investors.

With these changes now in place, real estate stakeholders must adapt by optimizing transaction timing, leveraging new tax-efficient investment structures, and rethinking their long-term asset allocation strategies. The key question that remains is—how will property investors recalibrate their portfolios to navigate these new tax realities effectively?