NEW DELHI: The real estate sector was in for a shock as the government on Tuesday removed the indexation benefit on long term capital gains on unlisted assets including real estate. Though the government has reduced the long term capital gains tax from 20% to 12.5%, the removal of indexation benefit is likely to offset the reduction of tax rates.
The move sent ripples across the real estate market with realty stocks taking a hit on Tuesday. BSE Realty Index fell by 2.15% on Tuesday. Shares of Macrotech developers declined the most by 4.73%, while DLF and Godrej Properties fell by 2.7% each. Only shares of Phoenix Mills ended in green with 1.57% gains.
The finance minister in her Budget speech said that simultaneously with rationalisation of rate to 12.5%, indexation available under second proviso to Section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold and other unlisted assets.
“This will ease computation of capital gains for the taxpayer and the tax administration,” she said.
Experts, however, see the removal of cost indexation on all assets a very significant change, which will impact real estate returns in a big way. “Indexation – linked assets – Real estate, gold and unlisted equity had indexation benefits which now will not be there. Real estate thus loses out the most,” said Sandipan Roy, CIO, Motilal Oswal Private Wealth.
Indexation is adjusting the purchasing price with inflation to arrive at the capital gains. Indexation reduces the capital gains, thus, reducing the tax liability.
Amit goyal, Managing Director, India Sotheby’s International Realty, however, said, “For real estate transaction, bringing down the long-term capital gains tax from 20% to 12.5% is a welcome step, even if it comes with removal of indexation benefits. This will encourage more liquidity in property transactions. Higher uniformity in long term capital gains tax across different asset classes was a long standing ask of investors.”
According to Vaibhav Gupta, partner, Dhruva Advisors, removal of cost indexation on all assets is a very significant change which will impact real estate returns in a big way. At the same time, for Indian promoters wanting to sell their unlisted businesses, the reduction in the tax from 20% to 12.5% is a very welcome change, he said.