By Anuj Puri

The Union Budget 2024 is a vision document for the long term, focusing on path-breaking measures for a Viksit Bharat. The government’s sustained efforts on nine priorities are aimed at generating ample opportunities and to tread firmly on the path of fiscal consolidation thereby maintaining the growth momentum. Its major focus continues to be on four pillars: farmers, poor, women, and youth.

The Budget has introduced notable changes to the taxation of capital gains derived from the sale of residential properties held for an extended period. However, physical real estate assets and investments in the form of real estate investment trusts (REITs) are being treated differently for the assessment of long-term capital gains (LTCG) tax.

In the case of REITs, the holding period has been reduced to 12 months from 36 months earlier. Thus, exiting a listed REIT after a period of one year will attract LTCG tax which now stands increased to 12.5% from 10% earlier.

Concurrently, the Budget has addressed a long-standing industry request by providing parity between listed units of REITs and listed equity shares through the reduction of the holding period to 12 months. This measure is expected to have a positive impact on the real estate investment landscape.

However, in the case of physical real estate assets, the LTCG tax stands reduced to 12.5% from 20% earlier. While this may appear as a relief to the sellers, the removal of the indexation benefit for the computation of the tax is likely to neutralise the benefit of the reduction. It is worthy to note that the withdrawal of the indexation benefit now simplifies the calculation of LTCG and aligns the taxation of real estate with other asset classes.

However, the fair market value of the asset acquired before April 1, 2001, shall be considered as the cost of acquisition of such properties for the computation of capital gains. This may have some impact on luxury properties as the market has recorded significant appreciation in the last few years. Price appreciation in the last five years has been in the range of 26% to 65% across the top seven cities in the country.

The exemption limit of LTCG has also been revised upwards. It has been proposed to raise the exemption limit to Rs 1.25 lakh from Rs 1 lakh earlier, thereby creating an opportunity to potentially save some money.

The short-term capital gains (STCG) tax rate remains unchanged in the current fiscal framework for physical real estate assets. Specifically, the profit derived from such gains continues to be incorporated into the taxpayer’s total income and is subsequently subject to taxation at the applicable slab rate. Furthermore, it is noteworthy that the prescribed holding period used to ascertain whether a gain is classified as long-term or short-term has been maintained at 24 months, in accordance with existing regulations.

These changes in the Budget 2024-25 reflect the government’s efforts to strike a balance between providing tax incentives for the real estate sector and ensuring a more streamlined and uniform approach to the taxation of capital gains across different asset categories.

To promote innovation and encourage the spirit of entrepreneurship exhibited by start-ups, the elimination of the angel tax appears to be a positive development. The angel tax, imposed on capital raised by unlisted companies through share issuance to Indian investors, was previously set at a substantial 30.9%. The abolition of this tax has the ability to enhance clarity on the structure and enables fundraising to be more supportive. This will also support founders looking to raise capital in the national and global markets.

The reduction of corporate tax rates from 40% to 35% for foreign entities are notably advantageous for start-up enterprises and global capability centres. This is an effective move to attract foreign capital for development purposes. However, the Budget has maintained the corporate tax rates for domestic firms at 22%. These measures are of particular significance, as these sectors have been substantial contributors to the demand for commercial real estate properties.

These policy decisions collectively reflect the government’s strategic approach to fostering growth and investment in the real estate sector, while also addressing key stakeholder concerns.

Moreover, in the updated income tax regime, individuals earning up to Rs 7.75 lakh will be exempt from income tax following revisions to tax slabs and an increase in the standard deduction. The new tax regime has been enhanced to appeal more to salaried employees with two significant adjustments: modifications to tax brackets and a rise in the standard deduction from Rs 50,000 to Rs 75,000. These adjustments to tax slabs and the increase in standard deduction are likely to result in taxpayers saving an additional `17,500 under the new tax regime.

However, the proposed Budget leaves the real estate industry wanting more. The sector necessitates a more comprehensive and supportive policy framework. This framework should encompass the following elements: official recognition of industry status, relief measures pertaining to the goods and services tax, and a streamlined approval process. These measures are deemed essential for the sector’s sustainable growth and development.

Anuj Puri Chairman, ANAROCK Group. Views are personal.