New realty LTCG regime may dampen prices, demand; return of cash may be limited: Experts

The removal of indexation may have a broad impact on the real estate sector, including the potential return of cash in transactions

As indexation, or linking to the cost inflation index while  calculating  the long-term capital gains (LTCG) tax, is removed for non-financial assets such as real estate, some have questioned whether this will lead to a return of cash in transactions. Experts say that while this remains a possibility, it may not be the norm.

The removal of indexation may impact real estate transactions in multiple ways, not only in secondary transactions but also in primary ones. These include a decline in demand for homes in the affordable or mid-range ticket sizes, a decrease in the price of certain types of  homes, and greater reinvestment in real estate assets to continue availing of capital gains tax benefits under section 54 of the Income Tax Act.

Abbas Jaorawala, Senior Director and Head of Direct Tax at Khaitan Legal Associates, said that in primary transactions, buyers may seek upfront discounts from developers to reduce the impact of the additional tax burden in the future. Additionally, sellers may not be able to hike property prices to soften the LTCG burden, especially for properties with relatively low prices or those that do not appreciate much.

"In secondary sales, sellers may increase the price of their property to absorb their additional tax outflow. This may not be realistic in transactions involving low or non-appreciating properties. The possibility of an increase in cash transactions in both primary and secondary sales also cannot be ruled out, which can be counterproductive to the government's efforts to formalise the economy," he said. However, he added that the scope for cash transactions may be limited, with taxes on the stamp duty value of the transaction being applicable to both buyers and sellers.

Regarding the possible increase in cash transactions, Gundeep Singh, Founder of the property consultancy Simplease, said that cash can be used to nullify the impact of the additional tax burden to some extent. However, he added that sales in gated communities may not witness this, as much of this housing is developed by listed and large developers, where disclosure and accounting checks and balances are relatively more robust. He noted that for land transactions, a part of the deal is still conducted in cash.

Mahaveer Jain, Director and Head of Real Estate at India Ratings and Research, said that while the impact of the removal of indexation is not an outright negative for real estate, it is a "dampener" on affordable and mid-range housing. "While taxation is one consideration in real estate investments, underlying returns are also important. For properties that have returns of 10-11 percent, the new capital gains tax regime is positive. For those properties whose prices have had inflation-limited growth, it can be a negative. Prices may decrease due to lower demand in some segments," Jain added.

With the measure being effective immediately, some buyers and sellers have gone back to the drawing board, according to market sources, to structure transactions to potentially reduce the tax burden. "For the transactions that have not been concluded and are in play, they are trying to readjust their workings, if there is an impact, or better if they redeploy that money in another asset, a real estate asset, and take a better IRR. We haven't seen any (withdrawals) at least till now," said Harsh Parikh, partner at the corporate law firm Khaitan & Co.