Indexation benefit to return? Government mulls relief for real-estate investors
The Indian government is currently examining various options to alleviate concerns from the real estate sector, following Finance Minister Nirmala Sitharaman's recent Budget 2024 announcement. Sitharaman declared the removal of indexation benefits from real estate and a decrease in the long-term capital gains (LTCG) tax on property from 20% to 12.5%. However, the elimination of indexation could potentially increase the tax burden on property transactions, affecting sellers significantly.
Possible exemption for transactions until July 2024
Sources have informed CNBC-TV18 that the government is contemplating various solutions, but no final decision has been reached. One potential option is the introduction of a grandfathering clause. This would allow transactions completed before July 2024 to continue benefiting from previous indexation rules. The concept of grandfathering allows certain existing conditions or benefits to persist for transactions made prior to the implementation of a new rule or law.
Choice between old and new LTCG regimes
Another option being considered by the government is to allow taxpayers to select between the old and new LTCG regimes for real estate transactions. This would offer investors the flexibility to pick the option that best aligns with their financial situation. The demand for these changes primarily originates from the real estate sector, with any relief measures likely to be specifically designed for this industry.
Impact on metro cities' resale markets
The withdrawal of indexation benefits could significantly affect resale markets in metro cities, including Mumbai and Delhi. Experts suggest that this change may decelerate sales in these markets, particularly impacting mid-segment properties ranging from ₹2 to ₹5 crore. Ritesh Mehta, Senior Director and Head (North and West), residential services and developer initiative at JLL India, stated: "Investors will now wait and watch before exiting from the property market now."
Potential short-term disruption and long-term benefits
Vivek Rathi, National Director of Research at Knight Frank India, suggested that the market could experience a short-term disruption as it adjusts to the new conditions. However, he added that if a property's value has increased more than the inflation rate, the new 12.5% tax rate could be more favorable for sellers rather than the previous 20% rate after adjusting for indexation.
