Shares of the real estate pack are broadly higher, with BSE Realty holding on to gains of two per cent after Centre amended the Finance Bill late last evening to allow an option of indexation relief for properties purchased before July 23.
Till August 7, the Realty Index has taken a knock of up to 9 per cent since the Union Budget when the indexation benefit was removed for real estate, with Lodha Developers being the worst hit. After the revision of provisions, shares of Lodha Developers and Oberoi Realty have gained the most, rising by as much as three percent in early trade on August 7, followed by DLF and Godrej Properties.
The rally in shares of real estate companies came today after the Central government, last evening, proposed an amendment in the Finance Bill pertaining to the indexation benefit rule for home/property owners.
What Has The Govt Proposed?
Under the proposed amendment, home owners, planning to sell their property bought before July 23, 2024 (Union Budget 2024-25 announcement day), can choose between the new and old tax regimes, whichever results in a lower tax liability.
Under the new long-term capital gains (LTCG) tax regime, the tax rate is set at 12.5 per cent without the benefit of indexation. Conversely, the old regime imposes a 20 per cent tax but allows for indexation benefits.
According to analysts, the earlier proposed LTCG tax rule for the real estate sector, removing indexation, favored investors who have generated high internal rate of return (IRRs), while investors with poor IRRs would have been worse off in the new regime.
Experts have welcomed the move, calling it a positive development for the sector. “Good idea. Will help quell that drama. But it means any new apartment or house sold from July 23 onwards gets no indexation,” said Deepak Shenoy, Founder and CEO of Capital Mind.
Niranjan Hiranandani of Hiranandani Group said, “The government’s initiative to allow taxpayers option to compute taxes at 12.5% without indexation or at 20% with indexation on real estate transactions marks a significant step forward, poised to drive investment and boost housing sales.”
“We are grateful for the forward-thinking approach in implementing these beneficial measures,” Hiranandani added.
That said, with the proposed amendment, the government has respected the legitimate concerns of many taxpayers. The proposal, now, gives ‘the best of both worlds’, they said.
“This is a huge relief to the middle-class owning real estate. There has been a lot of backlash on this proposal over the last few weeks as it was adversely impacting most home-owners particularly where the indexation benefit of the past 23 years of 3.63x of cost was not available to set off against sale consideration resulting in higher tax burden,” says tax expert Harsh Bhuta.
He said the amendment helps homeowners minimise tax burden when they sell house properties.
What Did Budget 2024 Say About LTCG & Indexation Benefits?
The July Budget had slashed LTCG tax on property to 12.5% from 20%, while removing the indexation benefit for properties purchased on or after April 1, 2001.
A re-think on the issue began after stakeholders of real estate sector made a representation suggesting that the new tax structure could increase tax burden for home owners and negatively impact the industry.
Indexation allows taxpayers to adjust the acquisition cost for inflation before computing capital gains, thereby bringing down the overall tax outgo.
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