How new tax rules are chipping away at real estate's investment appeal

The amendments to India's tax regulations over the last few years, including the reduction in indexation benefits in the July 2024 Budget, signal a clear shift in the government's approach toward real estate investment.

After the public outcry after the July 2024 Budget, the government allowed investors a choice of claiming indexation benefits with a higher long-term capital gains (LTCG) tax rate of 20 percent, as opposed to a lower rate of 12.5% without indexation. This choice is only for properties purchased before July 23, 2024. If you purchase a property after July 23, 2024, only the new rate of 12.5 percent without indexation will apply.

Over the past few years, there have been multiple amendments to the Income Tax Act that have adversely affected real estate investors. From stricter taxation rules, reduced incentives, and limited deductions, real estate investment has become far less attractive compared to other asset classes now.

Removal of indexation benefit

While the government rolled back the amendment to remove the indexation benefit from a retrospective date, and allowed the property investors who have bought properties before July 23, 2024, to choose between the old (with indexation) and the new rule (without indexation), while calculating LTCG from sale of property.

However, those who invest in properties now i.e. after July 23, 2024, will not be allowed to claim indexation benefit at the time calculating LTCG when they sell the property.

Income from real estate can only be disclosed under ‘Income from House property’

Budget 2024 made another key change. Income from letting out a house or part of a house by the owner will not be charged under 'profits and gains of business or profession'. It will now be taxable under 'income from house property' only.

This measure aims to prevent claims of higher expenses to reduce taxable rental income.

However, it may impact those genuinely running a business of letting out properties.

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Credit - Moneycontrol