The Union Budget 2024 has revised the Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) tax rates for financial and non-financial assets. In addition to this the holding period for most asset classes has been revised. How does this affect your real estate investments? Let's find out.

Capital gains refers to the increase in the value of a capital asset, such as real estate, gold, stocks, bonds, etc., from the time of purchase to the time of sale. The profit gained due to this difference is considered as 'income' and therefore applicable to be taxed. Holding period refers to the duration for which an asset has been held. Capitals gains, are categorised as short term or long term based on the holding period.

In the previous regime, different holding periods were considered for different types of assets. In the Union Budget 2024, this has been standardised to just two holding periods - 12 months and 24 months. For listed assets, a holding period of 12 months is needed to qualify as long-term capital gains and for unlisted assets a holding period of 24 months is needed to qualify as long-term capital gains. Where does real estate fall?

Stocks of listed real estate companies (listed in India), REITs and InvITs fall under the category of listed assets and are therefore appliable to the 12 month tenure. In the earlier regime REITs and InvITs needed to be held for a period of 36 months before they could qualify as long-term capital gains. Physical real estate is considered an unlisted asset and therefore a period of 24 months will be applicable to qualify for long-term capital gains. Shares of real estate companies, REITs, InvITs that are listed abroad will be considered as unlisted assets.

The Short Term Capital Gains (STCG) rate for all listed assets has increased from 15% to 20%, whereas unlisted assets will continue to be taxed according to the tax slab and rate applicable to the individual investor. The Long Term Capital Gains (LTCG) rate for all financial and non-financial assets has been reduced from 20% to 12.5% without any indexation benefit. However, a cut off rate has been offered - if you have purchased a property before 2001, the property valuation as of April 2001 will be considered as the acquisition cost which shall be used to determine capital gains.

The industry has had a mixed response to these changes. Mr. Tapan Ray, MD and Group CEO, GIFT City lauded the changes brought about in the Union Budget 2024. He believes that a tax-efficient regime for retail funds and ETFs will create new business opportunities for asset management companies in GIFT City and attract investments from NRIs and foreign retail investors into India.

Deep Vadodaria - CEO of NILA Spaces Limited echoed similar feelings, stating "The government's balanced approach, including the raise in both short-term and long-term capital gains, underscores a commitment to fiscal responsibility and sustainable economic growth. At this stage, raising taxes is a prudent move to ensure financial stability and support these ambitious development plans."

Mr. Vedanshu Kedia, Director, Prescon Group believes the removal of the indexation benefit will present a mixed impact for property sellers. According to him, " The indexation benefit has historically allowed sellers to adjust the purchase price of their property for inflation, thereby reducing the taxable gains. Without this adjustment, sellers may end up paying more tax in real terms, especially in a high-inflation environment."

He believes, "for many property owners, particularly those who have held their assets for a long period, the lack of indexation could result in a higher tax outgo than under the previous regime. This change might affect long-term investors and could potentially dampen the enthusiasm for long-term property investments. However, it is also essential to consider that the lower tax rate could incentivize more transactions and boost liquidity in the real estate market."

Whether you stand to gain or lose under the new regime will depend largely upon the average rate of appreciation your investment has witnessed over its tenure. In India, indexation for tax purposes has been taken at around 4 to 5% p.a. If your real estate investment has appreciated much higher than inflation, the new regime will serve well. However, if your property has appreciated at a rate lower than or very close to inflation, you may need to pay more. Having said that, over the last 20 years most properties have appreciated at a rate considerably higher than inflation and so the new regime is likely to have a more positive effect.