Real estate stocks decline as Budget 2024 removes indexation benefit on long term capital gains tax; DLF down 6%

Budget 2024 has removed indexation benefit from LTCG tax on real estate.

Real estate stocks fell after Finance Minister Nirmala Sitharaman proposed to eliminate the indexation benefit on calculating long term capital gains tax (LTCG) on real estate. The Nifty Realty index was down 2.6 percent in the afternoon trading on July 23. DLF stock fell more than 6 percent to  day’s low of Rs 778.2 over the Budget 2024 announcement.

The Finance Minister, in a bid to rationalise the capital gains tax regime, changed the Long Term Capital Gain tax rate to 12.5 percent across all financial and non-financial assets. This would result in the LTCG tax on property falling from 20 percent earlier.

Benchmark indices fell, with the Nifty 50 down 0.6 percent, or 136 points, and Sensex down 350 points.

Other realty stocks tanked too. Macrotech Developers was down 3.6 percent, Godrej Properties down 5 percent, Prestige Estates down 5.3 percent, Phoenix Mills down 2.1 percent.

The indexation benefit adds the inflation rate to the asset’s purchase price. At the time of the sale of the asset, this means a higher purchase price, resulting in a lower capital gain -- or even zero in some cases, eventually resulting in a tax benefit. Without indexation, the gain would be calculated on the actual purchase price, potentially resulting in a higher tax outgo.

“This proposal may not sooth taxpayers goosebumps as the proposal, in the garb of simplification, largely skews towards heightening tax rates in certain instances,” said Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP, regarding the overall LTCG proposals made in the Budget 2024.