India’s government has relaxed the new real estate tax rules it proposed two weeks ago following criticism that the changes significantly impact the middle class’s already heavy financial burden.
On July 23, India lowered the long-term capital gains tax on real estate to 12.5 percent from 20 percent. However, it dropped a benefit that allowed individuals to adjust prices for inflation before the calculation of capital gains.
New tax rules to drive investments
Now, the government is offering taxpayers the option of using the new tax rate or the previous 20 percent rate with the inflation adjustment. Real estate assets are considered to be long-term if they have been held for at least 24 months.
Commenting on the amendment, Niranjan Hiranandani, chairman, Hiranandani Group and NAREDCO, stated in a post on social media platform LinkedIn: “The removal of the indexation benefit for long-term capital gains in real estate is likely to significantly impact property owners’ holdings of assets for more than 10 years.”
Indexation is a method used to adjust the purchase price of an asset for inflation over time. This adjustment helps to reduce the taxable capital gains when selling the property. By removing indexation, India aims to simplify the tax calculation process. However, this change has resulted in higher tax liabilities for property owners. Hence, they needed to use the original purchase price to calculate capital gains, without any adjustment for inflation.
Industry leaders said that this is a step in the right direction. They believe that the amendment will drive investment in the real estate sector and boost sales across all housing segments.
Read: U.S. home sales dip as median price rises 4.1 percent to all-time high
Lower capital gains tax to prop up sector
The change in real estate tax rules comes after criticism from opposition parties that India’s Prime Minister Narendra Modi’s first budget since his re-election aimed to increase the tax burden on the middle class.
“Owners of heritage homes may face a higher tax burden upon sale, as the absence of indexation prevents adjusting the property’s cost basis for inflation. The change could result in higher taxes for individuals who want to sell assets held for more than 10 years,” he added.
Hiranandani explained that new investors holding properties for more than two years will benefit from the lower long-term capital gains tax. This will make short- and mid-term investments in India’s property sector more attractive.
“Hence, taking away indexation benefits won’t hurt real estate investment in the future. Thus, equalizing asset classes such as real estate and the capital market will present investors with more attractive options for parking their earnings in real estate,” Hiranandani added.
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