The Union Budget 2024 introduced significant changes to the Capital Gains tax structure, sparking mixed reactions. To address concerns, the Finance Ministry amended the Finance Bill 2024, allowing resident individuals and HUFs to "grandfather" long-term capital gains on land and buildings for property purchases made before July 23, 2024. In any investment proposal there are three critical factors that come into play: risk, inflation and taxation. Comparison between investments is usually done on a pre-tax, risk adjusted return basis rather than on nominal rates of return. The aspect of taxation of an investment, while critical, should be viewed and applied with caution. In any medium to long term investment the stability of the current tax rates cannot be taken for granted and therefore taking an investment decision driven solely by the current tax structures may become misleading and diversionary.
The Union Budget 2024 announced in July this year, brought about critical changes to the Capital Gains tax structure. These changes have evoked mixed reactions from industry experts and appears to have increased concerns amongst the general public. To address these concerns the Finance Ministry has made a few amendments to the tabled Finance Bill 2024. Notable amongst these includes the option of 'grandfathering' long term capital gains on land and buildings, only for resident individuals and HUFs'. They can now opt for 20% LTCG with indexation or the new flat 12.5% LTCG without indexation for those property purchases already made before 23rd July 2024.
In any investment proposal there are three critical factors that come into play: risk, inflation and taxation. To accurately ascertain the viability of an investment, one should first deduct inflation from the nominal returns to arrive at the real returns. According to a press release by Press Information Bureau (PIB), the annual inflation rate based on all India Consumer Price Index (CPI) number is 4.83% for April 2024. After deducting inflation, assess the risk premium of your investment. Investments such as VC funding, equities and unsecured debt tend to carry higher risk premiums as compared to more stable and secure investments such as real estate, gold, government bonds, etc. One can deduce the risk adjusted returns of an investment only after subtracting the risk premium on that class of assets and so comparison between investments is usually done on a pre-tax, risk adjusted return basis rather than on nominal rates of return.
The aspect of taxation on an investment is no doubt a critical factor but should be viewed and applied with caution. In any medium to long term investment the stability of the current tax rates cannot be taken for granted. Hence the impact of taxation becomes as critical as other factors only when the applicable rates are onerous and regressive. The aspect of taxation is also considered seriously by large institutional investors as a small increase or decrease over a large investment amount, generally running into millions of dollars, can make a significant impact on the return for the investor. However, for retail investors a change in rates or the way of computation should not really be construed as a paramount factor for taking investment decisions.
Real estate investments are generally made for inflation hedging, portfolio diversification and to achieve a secular trend of capital appreciation over the medium to long term given the demand and supply dynamics in the property sector. To truly understand the direct and indirect factors that could impact your real estate investment, it is important to be cognizant of the larger environment.
The tax regime in India has changed drastically over the past decade to reflect the country's growing economic needs. While it continues to evolve, the current regime is almost at par with most developing countries. However, this could change in the future and therefore taking an investment decision driven solely by the current tax structures may become misleading and diversionary. In a constantly evolving environment, it becomes more important to assess the current scenario and work out the best solution rather than trying to benefit significantly from tax planning.
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