In a significant move outlined in Budget 2024, Finance Minister Nirmala Sitharaman has announced the removal of indexation benefits for property sales. This change is expected to have a notable impact on the real estate market, particularly for short-term investments.
The Finance Minister also revealed a reduction in the Long Term Capital Gains (LTCG) tax rate on property sales, dropping from 20% to 12.5%. This adjustment is part of a broader effort to simplify the tax code and streamline the calculation of capital gains.
The budget document explained, "With the rationalisation of the rate to 12.5%, the indexation available under the second proviso to Section 48 is proposed to be removed for the calculation of any long-term capital gains, which is presently available for property, gold, and other unlisted assets. This will ease the computation of capital gains for the taxpayer and the tax administration." The new regulations took effect immediately from July 23, 2024.
Global brokerage firm CLSA has weighed in on the changes, noting that while end-users who sell their existing homes to purchase new ones are unlikely to be affected, investors selling property to reinvest in other assets will feel the impact. CLSA stated, "We believe the impact of this new regime is likely to be negative for investors with a holding period of less than 5 years and where property price appreciation is moderate (less than 10% per annum)."
On the flip side, CLSA suggests that the new regime might be neutral or even slightly beneficial for long-term investments, particularly those held for over 10 years with property price appreciation exceeding 10% per annum. The brokerage also predicts that end-user driven markets like Bangalore, Hyderabad, and Pune will be the least affected. In contrast, markets such as NCR and Mumbai, known for higher investor activity, are expected to face more significant challenges.
Additionally, the impact on super-luxury apartments priced above ₹10 crore will be negligible, as last year's budget had already capped the indexed cost of acquisition at ₹10 crore.
Overall, the removal of indexation benefits and the reduction of the LTCG tax rate in Budget 2024 mark a pivotal shift in the real estate taxation landscape, aiming to rationalise taxes across all asset classes.
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