Real estate investments with shorter duration, moderate price growth to be hurt the most with indexation benefit removal: CLSA

Real estate investments with shorter duration, moderate price growth to be hurt the most with indexation benefit removal: CLSA

Finance Minister Nirmala Sitharaman’s move to reduce long-term capital gains tax (LTCG) on real estate investments to 12.5 percent from 20 percent, albeit with the removal of the indexation benefit that was previously available for investors, will hurt shorter-duration investments, which have seen moderate price growth, noted brokerage firm CLSA in a report on July 23.

"We estimate that under the new regime, the LTCG tax incidence is higher when the holding period is lower (less than 10 years) and property price appreciation is less than 10% p.a.,” the CLSA report said.

Conversely, the LTCG tax in the new regime would be neutral/marginally beneficial for investors who hold it for a longer duration (10 years and over) and where property price appreciation is healthy (greater than 10% p.a.).

The removal of indexation benefits will not apply to old properties held before 2001, and they will continue to get indexation benefits.

CLSA believes that markets like Bangalore, Hyderabad, and Pune, which are end-user-driven will be the least impacted by this move, while markets like Delhi NCR and Mumbai, which have higher investor activity, are likely to be adversely impacted.

This move is unlikely to impact the end-users who sell their existing house and reinvest in a new house, as LTCG is not applicable in such instances, CLSA noted in its report.

Real estate stocks fell after the finance minister proposed to eliminate the indexation benefit on calculating LTCG on real estate. The Nifty Realty index was down 2.29 percent in the afternoon trade on July 23. The DLF stock fell more than 6 percent to the day’s low of Rs 778.2, while  Oberoi Realty closed 3.3 percent lower than its previous close at Rs 1,686.75