This year's budget presents a mixed bag for the real estate sector, introducing significant changes to property taxes alongside a renewed focus on infrastructure development. Let's delve deeper into these key announcements and their potential impact.

Understanding indexation and its removal

For property owners contemplating a sale, the budget ushers in a new tax rule affecting capital gains. Up until now, the Long Term Capital Gains (LTCG) tax rate applicable on the sale of properties was 20% with indexation benefits. The Union Budget 2024 has standardised the Long Term Capital Gains (LTCG) tax rate applicable on the sale of all financial and non-financial assets (including properties) at 12.5%, without any indexation benefit. What does this mean?

Indexation is a tool used by governments to adjust a price of one item based on changes in the inflation rate based on a basket of composite prices. It is most commonly used to alleviate the negative effects of inflation. Suppose you purchased a property in 2000 for INR 50 lakh. By 2024, the market value of your property has significantly increased. Indexation allows you to adjust the purchase price for inflation over the years. This results in a higher cost price for tax purposes, effectively reducing the taxable profit (capital gains) on the sale.

The removal of indexation does not necessarily mean one may have to pay more tax when selling a property. In India, indexation for tax purposes has been taken around 4 to 5% p.a. The new regime offers a 7.5% reduction in tax applicable on profits. Therefore, in about 8-10 years one would break even, that is to say, people who have held a property for a short term stand to gain whereas those who have held on to a property for over 8 to 10 years will potentially have to pay more.

Infrastructure Boost

The Union Budget 2024 has allocated INR 11.1 trillion crore for capital expenditure, representing 3.4% of GDP. The Financial Minister has emphasised the continuation of substantial infrastructure investments over the next five years, and States have been encouraged to align their support with these priorities. To stimulate private investment in infrastructure, viability gap funding and a new market-based financing framework will be introduced. A boost in infrastructure will bring about improved connectivity, increase jobs, housing needs, etc. thereby tremendously increasing the scope of real estate development across all sectors.

Urban Development

The PM Awas Yojana-Urban 2.0 aims to deliver one crore houses for the urban poor, backed by an allocation of INR 10 trillion crore. This significant investment underscores the government's commitment to addressing the housing needs of a large segment of the population. Services for urban development will be extended to 100 large cities across the country, which could include improvements in infrastructure, waste management, and public transport systems. Recognizing the success of the Svanidhi Scheme, the budget proposes further support for urban haats (markets). This could involve infrastructure enhancements, marketing initiatives, and better access to financing for street vendors, thus bolstering local economies.

Reduced Stamp Duty

This year’s Budget encourages states to adopt a two-pronged approach to stamp duty, a tax levied on property purchases. The government suggests that states moderate stamp duty rates to make property transactions more affordable and reduce rates specifically for women homebuyers, promoting women's ownership of property. This comprehensive approach aims to make the urban housing market more inclusive and accessible.

Lower deductions on rental payments

The Union Budget announced a lower percentage of tax deducted at source (TDS) on house rent payments exceeding INR 50,000/-. It also amended section 194-IB and reduced the rate of TDS to 2% from 5%. The government also announced plans to introduce policies and regulations for transparent rental markets, potentially benefiting both tenants and landlords by providing clearer guidelines and protections.

The industry weighs in

Mr. Prashant Sharma, President, NAREDCO Maharashtra, applauded the Union Budget 2024-25 for its comprehensive approach towards job creation and boosting development, both of which he believes are positive developments for the real estate sector.

According to him, the PM Package with five schemes focused on employment and skilling, with an allocation of Rs 2 lakh crore, and a significant provision of Rs 1.48 lakh crore for education, employment, and skilling, is a welcome move. He believes these initiatives will undoubtedly create a ripple effect, enhancing the economic landscape and increasing demand for residential and commercial properties.

Further, he believes, the sanctioning of 12 industrial parks under the National Industrial Corridor Development Programme, the facilitation of rental housing with dormitory-type accommodation for industrial workers in PPP mode, and the formulation of transit-oriented development programmes for 14 large cities are strategic moves that will enhance urban infrastructure and support industrial growth.

Mr. Pritam Chivukula, Co-Founder & Director, Tridhaatu Realty and Vice President, CREDAI-MCHI expressed similar emotions while wholeheartedly welcoming the Union Budget, which he believes reflected expectations, while promoting an atmosphere conducive to economic growth.

According to him, an outlay of 10 lac crore for urban housing under PM Awaas Yojana is a welcome move as it will give a significant boost in providing housing across major cities in the country. With a huge shift in the population moving from rural to urban areas, this move will immensely benefit in providing a roof over the head of our urban population.

Further, he believes, the 2.66 lac crore allocation for rural development and infrastructure will benefit people in rural India to become self-reliant and uplift their living standards, thereby discouraging them from moving into urban areas and encouraging overall development of the country.

Mr Jitendra Mehta, President of CREDAI MCHI Thane, lauded the Union Budget 2024, commenting, “from an industry perspective, the Hon’ble Finance Minister’s announcement about working with the states on a slew of land related reforms, which covers land administration, planning and urban planning and building bye-laws will be a positive. Additionally, assignment a unique Aadhaar for all lands, digitisation of terrestrial maps, survey of lands, and establishment of land registry, with land records in urban areas to be digitised will positively impact real estate.”