Shares of realty companies staged a sharp rebound on July 24, surging up to 8 percent intraday, just a day after these counters registered decline following finance minister Nirmala Sitharaman's proposal to remove the indexation benefit on calculating long term capital gains tax (LTCG) on real estate.
Shares of Macrotech Developers were up 1.1 percent, Sobha up 3.1 percent, Prestige Estates up 5.4 percent, Ajmera Realty up 2.8 percent, DLF up 2 percent and Oberoi Realty up 3.4 percent.
The indexation benefit adjusts the asset’s purchase price for inflation. At the time of sale, this results in a higher purchase price and a lower capital gain, potentially reducing the tax liability or even eliminating it. Without indexation, the gain is calculated on the actual purchase price, likely leading to higher taxes.
Following the proposal, realty stocks witnessed strong selling on July 23, with major names like Godrej Properties and Prestige Estates slumping as much as 5 percent intraday.
However, to ease the increased tax burden and rationalise the capital gains tax regime, the finance minister also changed the LTCG 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.
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Market and industry participants still remain skeptical of the proposal while some like S Naren, CIO of ICICI Prudential, welcome the decision. "Government steps to aid asset allocation like removal of indexation should increase transaction volumes," Naren said in an interaction with CNBC-TV18.
On the other hand, analysts at CLSA's suggest that the change will affect short-term investments with market price growth of less than 10 percent.
"However, for investments held for over ten years with property price appreciation exceeding 10 percent per annum, the impact of the new regime would be neutral or slightly beneficial," CLSA added.
Analysts at CLSA also highlighted that markets like Bangalore, Hyderabad, and Pune, which are driven by end-users, will be the least impacted. In contrast, markets like NCR and Mumbai, with higher investor activity, are likely to be adversely affected.
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