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Mumbai’s resale real estate market is expected to feel the pinch with Budget 2024 doing away with the indexation benefits on long-term capital gains (LTCG) on sale of property.
According to experts, the Mumbai real estate market is primarily led by buyers who sell small units to upgrade to larger homes. This coupled with the performance of the stock market and the upcoming assembly elections in the state may lead to property transactions cooling off in Mumbai.
Union Budget 2024-2025 proposals
Union Finance Minister Nirmala Sitharaman on July 24 had proposed to do away with the indexation benefit on sale of property, that allowed home owners the benefit of adjusting their gains against inflation. This, say real estate experts, may lead to higher tax burden on real estate transactions and severely impact property sellers.
The long-term capital gains (LTCG) has been reduced from 20% with indexation benefit to 12.5% without indexation for the real estate sector.
What is indexation?
Indexation allows one to adjust the purchase price of an asset for inflation, reducing taxable profits and tax liabilities. Without this adjustment, individuals paying tax may have to pay increased taxes despite the lower LTCG rate.
Also Read: Budget 2024: Removal of indexation benefit may lead to higher tax burden on real estate sales, say experts
What does this mean for the Mumbai real estate market?
According to real estate experts, removal of indexation will slow down sales in the secondary market, also known as resale market in metro cities, including the Mumbai real estate market.
“The overall real estate market in Mumbai and other metro cities might be affected wherein resale transactions may slow down in the secondary market, not only in Mumbai but also in other metro cities. The mid-segment market, specifically in the range of ₹2 to ₹5 crore might be impacted and even investors might put their decision to sell on hold. Investors will now wait and watch before exiting from the property market now. Having said this, it depends on individual investment goals,” said Ritesh Mehta, Senior Director, and Head (North and West), residential services and developer initiative, JLL India, a real estate consultancy firm.
“However, it also depends on how the Indian stock market performs in the coming months. Real estate transactions are also connected with the performance of the Indian stock market,” he added.
Another expert not wishing to be named said, “The mid-segment and luxury segment of Mumbai real estate market is already overheated and is likely to cool off in the coming months. While we cannot say that there will be a drastic downfall, the market will reflect these changes.”
“The state of Maharashtra is expected to go for polls in the next two to three months and hence there will not be too many transactions by investors. Investors, including developers, are in a wait-and-watch mode and therefore we may see some stagnancy. While we do not see any slowdown and properties are getting registered, we have to understand that these deals were finalized in the last 90 days. Typically, the real impact of removal of the indexation benefit may be felt over the next six to nine months.”
On an average, the Mumbai real estate market has reported over 10,000 property registrations on a monthly basis of which 80% of the property registrations are in the residential segment. Experts opine that out of these 80%, a significant portion of homebuying happens on account of buyers upgrading their homes, especially post Covid-19.
Also Read: Budget 2024: Planning to sell a property bought after 2001? Here are 7 things that you should know
Higher taxation may lead to short term disruption in the secondary real estate market
Vivek Rathi, National Director, Research, Knight Frank India, a real estate consultancy firm said, “There could be a short term impact where the market adjusts itself to the new reality. Eventually market conditions are expected to normalize. There might be a short-term adjustment period as the market adapts to the new conditions. However, market conditions are expected to stabilize over time.”
Rathi added that if the property’s value has risen more than the inflation rate, the new 12.5% tax rate is likely to be more favorable for real estate sellers compared to the previous 20% rate after adjusting for indexation.
Also Read: Election 2024 result impact: Maharashtra’s real estate market may go into a wait and watch mode ahead of assembly polls
What does removal of indexation benefit mean for plotted developments?
Investments in plotted developments picked up post Covid-19. However, real estate developers are of the opinion that the impact of changes in LTCG on plotted developments or other real estate segments is similar.
“The House of Abhinandan Lodha (HoABL) has been offering plotted developments for the past three years, and our advice to our customers has been to buy land if you plan to hold it for more than 10 years. However, if investors seek an early exit to meet any contingencies, the reduced LTCG rate from 20% to 12.5%, along with the shortened holding period from three years to two years, makes exit more attractive. While we still recommend long-term holdings, these changes offer greater flexibility for investors,” said Abhinandan Lodha, chairman, HoABL.
On the impact of removal of indexation benefit on vertical developments, Abhinandan Lodha said that the “vertical real estate market, particularly in metros, has generally provided single-digit compounded returns and hence investors and HNIs looking to exit now will benefit from the reduced tax rate of 12.5%.”
