Eliminating Indexation Benefits Hits India's High-End Real Estate

Chennai: The elimination of indexation benefits will mainly hit the high-end property segment in real estate as the annual returns in the segment hover around 10 -11 per cent. This will dampen investor interest in high-end properties and affect the price appreciation in the segment, which has witnessed heightened activity since the pandemic.

One of the most notable changes brought in by the Budget is the elimination of the indexation benefit on the sale of non-financial assets, including real estate. In affordable housing with ticket size below Rs 70 lakh, the impact could be neutral as these customer segments may not necessarily trade in real estate and are primarily end-users, finds India Ratings.

While the long-term capital gains tax rate has been reduced to 12.5 per cent from 20 per cent, due to the removal of indexation, properties with an annual rate of appreciation of 13 per cent and above will benefit in terms of tax outflow and those below it will record a loss when yearly inflation is taken into consideration. This may dampen investor sentiments, particularly in the high-end segments where returns hover around 10 per cent-11 per cent per annum.

The reduction in investor demand could make it difficult to take price hikes in the near term, as investors may be wary of large exposures due to higher tax outflows. The grandfathering of property values indexed up to 2001 provides some relief for landowners of ancestral properties. However, the benefit can only be accrued from the new scheme if the CAGR returns are over 11-13 per cent.

In recent years, there has been a consistent increase in the sale of properties in higher price brackets, including those valued between Rs 75 lakh-1 crore and above Rs 1 crore due to a growing inclination towards upscale real estate offerings, potentially driven by factors such as increased disposable income and changing lifestyle preferences. High-value property transactions, particularly those valued at Rs 1 crore and above accounted for a substantial 37 per cent share of all transactions in the first quarter of 2024, up from 16 per cent in the corresponding period of 2019, prior to the pandemic.