Shares of real estate companies have witnessed a significant rise following the Central government’s proposed amendment to the Finance Bill, which allows an option of indexation relief for properties purchased before July 23. This move has brought relief to the real estate sector, which had taken a hit after the removal of the indexation benefit in the Union Budget.
Market Reaction
The BSE Realty index has gained two percent, with shares of Lodha Developers and Oberoi Realty leading the rally, rising by as much as three percent in early trade on August 7. DLF and Godrej Properties also saw substantial gains. The Realty Index had previously taken a knock of up to nine percent since the Union Budget, with Lodha Developers being the worst hit.
What Has the Govt Proposed?
Under the proposed amendment, homeowners planning to sell their property bought before July 23, 2024, can choose between the new and old tax regimes, whichever results in a lower tax liability. The new long-term capital gains (LTCG) tax regime imposes a 12.5 percent tax rate without the benefit of indexation, while the old regime imposes a 20 percent tax but allows for indexation benefits.
Expert Opinions
Analysts have welcomed the move, calling it a positive development for the sector. Deepak Shenoy, Founder and CEO of Capital Mind, said, “Good idea. Will help quell that drama. But it means any new apartment or house sold from July 23 onwards gets no indexation.”
Niranjan Hiranandani of Hiranandani Group praised the government’s initiative, stating, “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.”
Tax expert Harsh Bhuta highlighted the relief this amendment brings to the middle class, saying, “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.”
Background on LTCG and Indexation Benefits
The July Budget had slashed LTCG tax on property to 12.5 percent from 20 percent, while removing the indexation benefit for properties purchased on or after April 1, 2001. This move sparked concerns among stakeholders in the real estate sector, who argued that the new tax structure could increase the tax burden for homeowners and negatively impact the industry.
Indexation allows taxpayers to adjust the acquisition cost for inflation before computing capital gains, thereby reducing the overall tax outgo. The proposed amendment addresses these concerns by giving taxpayers the option to choose the tax regime that minimizes their tax burden.
The government’s proposed amendment to the Finance Bill has been well-received by the real estate sector and experts alike. By allowing homeowners to choose between the new and old tax regimes, the government has provided a much-needed relief to the middle class and addressed the legitimate concerns of taxpayers. This move is expected to drive investment and boost housing sales, contributing to the overall growth of the real estate sector.
