Ajay Seth, Secretary, DEA, was questioned about the rationale behind this move, particularly given that revenue generation was not the stated objective. Finance Minister Nirmala Sitharaman’s decision to eliminate this provision, effective July 23, 2024, is expected to significantly impact the real estate market.
The removal of indexation benefits for long-term capital gains on real estate, announced in the Union Budget 2024, has sparked intense debate. Finance Minister Nirmala Sitharaman’s decision to eliminate this provision, effective July 23, 2024, is expected to significantly impact the real estate market.
At the India Today-Business Today Budget Round Table 2024, Ajay Seth, Secretary, DEA, was questioned about the rationale behind this move, particularly given that revenue generation was not the stated objective. Seth said, "Historically, our taxation policy was instrumental in steering investments towards specific asset classes. For instance, tax incentives were offered to promote small savings schemes and listed securities over unlisted ones. However, we've moved beyond this approach. The Finance Minister has outlined a vision in the Direct Tax Code for a more equitable taxation system that treats all asset classes and investors equally."
"The only differentiation will be between short-term and long-term investments, as the latter is generally considered more beneficial for the economy. The government has eliminated preferential tax treatment for debt instruments, allowing investors to make informed decisions based solely on their risk-return preferences across various asset classes, including equity, gold, and real estate. The question of indexation, specifically, is not a policy matter; it's about accurately reflecting inflation's impact on investment returns. Ultimately, investors are best positioned to assess their risk tolerance and potential returns," added Seth.
Many experts view the reduction of long-term capital gains tax to 12.5% as a positive step, despite the elimination of indexation benefits. This move is expected to increase liquidity in the real estate market. Additionally, aligning long-term capital gains tax rates across different asset classes has been a long-standing investor demand. The government's focus on digitisation, efficient land management, and updated regulations is also seen as a catalyst for urbanisation and real estate development, simplifying property transactions and boosting municipal revenues through increased property taxes.
Impact on Real Estate Market:
The removal of indexation benefits is anticipated to have a significant impact on the real estate market. Without indexation, the long-term capital gains tax on properties purchased after 2010 could surge by 290%, according to a BankBazaar report. This could deter long-term real estate investments and lead to a shift in investor preference towards other asset classes.
Expert Opinions:
Despite the concerns, some experts believe that the reduction in long-term capital gains tax to 12.5% could be beneficial. The uniform tax rate across different asset classes is expected to create a level playing field, making real estate investments more attractive compared to other options like equities or debt instruments.
Government's Vision:
The government's emphasis on digitisation and efficient land management is expected to drive urbanisation and real estate development. Improved property transaction processes and updated regulations are likely to boost municipal revenues through increased property taxes.
Conclusion:
The elimination of indexation benefits for real estate, while controversial, is part of a broader effort to create a more equitable taxation system. The impact of this change will unfold over time, but the government's focus on creating a transparent and efficient real estate market remains clear.
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