Reduction in tenure of long-term capital gains
Real estate investors, who were looking for a quick exit option to switch their investment or to book profits, were often discouraged by the long-term capital gain (LTCG) restriction of 3 years. In the Union Budget 2017-18, the finance minister Arun Jaitley, has proposed to reduce the tenure for LTCG from 3 years to 2 years.
Neeraj Bansal, partner and head of real estate and construction, KPMG in India, says that the reduction in the holding period for land and buildings from 3 years to 2 years for long-term capital gains purpose, would help to improve the investment ability in properties in comparison to shares and stocks where the period is 1 year.
Investors who were holding on to properties, will benefit from this reduction in tenure. Post demonetisation, it may also help investors to re-enter the realty market.
“Capital gains on joint development agreements (JDAs) to be taxed only at product launch, 1-year tax exemption from notional rental income for unsold inventory and the reduction of LTCG tax period, will help those holding real estate inventory/ stock. It will provide relief to developers in the residential sector, where sales have significantly dropped after the demonetisation drive,” maintains Joe Verghese, managing director, Colliers International India.
“The reduction in long term capital gains from 3 years to 2 years, along the change in the base year of indexation to 2001, could boost the secondary market. The budget has several measures that could increase job creation and increase the money in the hands of the consumers, through lower tax rates in certain income bands. This could positively impact the overall buyer sentiment in the real estate sector,” adds Shubika Bilkha, business head of The Real Estate Management Institute (REMI).
Clarity on capital gains tax for joint development agreements
Jaitley also announced clarity on the capital gains tax on land owners opting for joint development of projects. For development of properties through JDAs, he said that the liability to pay capital gains tax, will arise in the year the project is completed. This is likely to reduce the disputes in joint development projects.
“Changes in the taxation aspect of JDAs, will greatly encourage more land owners to partner with developers. This will benefit the real estate developers and in turn, is likely to benefit the end consumers. The reduction in LTCG tenure will also help the marketability of real estate as an asset class,” explains Shishir Baijal, chairman and managing director, Knight Frank India.
The government has been accommodative of the concerns of the real estate sector, feels Anshuman Magazine, chairman – India and south-east Asia, CBRE. “The relaxation on long term capital gains, joint development agreements and tax rebates for builders, will help reduce their tax liability. While greater rebates were expected in individual tax rates, nonetheless, the rebate for individuals earning up to Rs 5 lakhs, will help increase their disposable incomes,” he elaborates. Among the measures announced for the real estate sector, experts believe that a lower long term capital gain tenure, would enable investors to put fresh money in the market and reap the benefits of price corrections, post the recent demonetisation.