With a nearly 7.3% contribution to the nation’s GDP, India’s real estate sector is a key component of our economy. Policy stability and favorable measures are the driving forces behind every sector. However, the real estate sector’s potential is often hampered due to India’s complex and changing regulatory landscape.
For instance, the Union Budget 2024 was expected to simplify concerns related to the sector’s industry status and the implementation of a single-window clearance system. Instead, the government introduced changes that would shift the balance in the real estate sector. As these come into effect, it is recommended that real estate property developers, investors, and homebuyers familiarize themselves with the reforms and streamline their planning accordingly.
The Latest Reforms Proposed in the Union Budget 2024
Here are the latest changes announced in the Union Budget 2024 that are expected to impact all major real estate stakeholders:
Change in the holding period of long-term assets
In this year’s budget, the government made the holding period of long-term assets the same as the rest of the equity market to bring uniformity in tax treatment. It is expected that the change will benefit newer asset classes like Real Estate Investment Trusts (REITs), SMREITs, and Infrastructure Investment Trusts (InvITs). Typically, reducing the holding period for long-term assets from 3 years to 1 year will increase these new assets’ liquidity and appeal in the market. Needless to say, it will directly contribute to the growth of India’s $300 billion real estate market.
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Revision of the long-term capital gains tax rate
Real estate investments held over a period of over 24 months are classified as long-term investments. Notably, the gains on these investments are eligible for tax benefits. Previously, the long-term capital gains on such property sales were calculated after adjusting the acquisition cost and factoring in the cost inflation index (CII). It helped property owners lower their taxable amount and protect capital gains.
Now, this year, the government proposed the removal of the indexation benefit for property sales in the Union Budget. The measure would prevent property owners from adjusting their costs against the inflation rate. This would increase the tax liability on property sale proceeds, increasing pressure on middle-class homeowners. While the government tried to compensate taxpayers by reducing the long-term capital gain tax from 20% to 12.5% on all investments except the debt category, it was met with backlash. The backlash, along with concerns over reduced real estate activities and investments, drove the government to reconsider the change and roll out a more flexible approach.
Under the revised reform, taxpayers can choose between the old 20% tax rate with indexation benefits and the new 12.5% rate without indexation. This system will help them opt for a beneficial tax treatment based on their holding period and the impact of inflation, reducing their tax burden. It can help ease the financial pressure on middle-class homeowners, making homeownership more accessible and accelerating the demand for affordable housing projects.
Proposal to enhance the ease of doing business
The government’s focus on enhancing the ‘Ease of Doing Business’ through initiatives such as Business Reforms Action Plans, digitization, and simplifying custom duties is expected to prompt more changes. The initiatives to ease customs duties and business operations could boost FDI and overseas investments in India. The anticipated change may increase business activities and generate employment opportunities in the nation, in turn, accelerating the growth of real estate. In this regard, it is important to track these changes and the development of these proposals to build suitable strategies. Since infrastructure development-centric initiatives are bound to benefit commercial players, keeping an eye on prospects and market reception would help them plan their projects more effectively.
Based on these, it can be said that navigating India’s ever-changing real estate regulations requires an in-depth understanding of the latest reforms and their anticipated impact. For instance, this year’s budget introduced several changes, especially those focused on long-term capital gains tax and the holding period of capital assets, which would transform the sector. This changing landscape demands that property developers, investors, and homebuyers become more aware of the changes and be agile in their decision-making.
(By Harish Fabiani, Group Chairman of IndiaLand Group)
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