With the reduction, in the holding period of properties under the Long-Term Capital Gains tax, now being two years (from the existing three years), issues pertaining to inventory overhang and sales deficit could be favourably addressed, feel experts
In the Union Budget 2017 announcement, the eligible tenure for Long-Term Capital Gain (LTCG) tax on real estate has been reduced from the existing three years to two years. Realty years to two years. Realty experts recognise it to be a turning point from a long-term perspective.“The Budget 2017-18 has lowered the holding period, for gains to qualify as long-term in the case of immovable proper ty, to two years from three years currently.Also, the base year for calculation of capital gains with the indexation benefit is also proposed to be shifted from 1981 to 2001. Currently, capital gains on immovable properties qualify as long-term capital gain if the holding period is more than three years and the base year for calculating the capital gain is 1st April 1981,“ informs Ajay Jain, executive director investment banking and head real estate group, Centrum Capital Limited.
LTCG TAX NORMS:
Experts explain that as a rule, an asset can qualify for Long-Term Capital Asset (LTCA) if it is held for atleast 36 months. The finance minister has made an exception to this in the current budget by reducing the holding period for land and property to 24 months for it to be qualified as LTCA. LTCG are taxed at 20 per cent with the indexation benefit, while Short-Term Capital Gains (STCG) are taxed as per the slab rate applicable to the assesse and the indexation benefit is not available.“Saving of tax on LTCG under Section 54 of the Income Tax Act further encourages investors to hold the assets for it to be qualified as a LTCA. This budget has extended the scope of long-term bonds under section 54EC to three year bonds as notified by the government. Currently, investments in bonds issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited are eligible for exemption under this section. This amendment will take effect from April 1, 2018,“ says Sharad Mittal, director and head Real Estate Investment (MORE).
LTCG TENURE REDUCTION TO HELP OVERCOME INVENTORY OVERHANG:
Both investors and end-users, looking to sell their property now, need not wait till 36 months to avail the benefits of the LTCG. Ramratthinam S CEO, Muthoot Homefin (India) Limited points out, “The reduction of the holding period from three years to two years will help bring in transparency, certainty and predictability to real estate transactions in the secondary market and benefit investors in real estate.Builders are now allowed to keep their unsold stock without attracting any income tax liability for upto one year after receiving the completion certificate for their housing projects so that they get ample time to liquidate their inventory.“ Experts also believe that owners of a landbuildinghouse property holding it an investment product for more than two years but less than three years, may find buyers at attractive prices due to the location advantages, ready property and also the fact that they can decide to switch invest ments in favour of that, which would give a higher returnhuge discount. Similarly, owners of self-occupied property can move to another property, which would give them a price benefit or can assist in getting a bigger house by paying a lesser differential price and also enjoy benefits of the falling rate of interest on the housing loan. In such a situation, a developer would find additional buyers for their project and would help them in the reduction of inventory.
Commenting on the importance of a price correction for supporting the sale and reducing the inventory overhang, Nidhi Seksaria, advisory partner and leader Real Estate, BDO India says, “Since the inventory overhang is mostly in under-construction stock, which has not seen much appreciation in the recent years, investors of such a project may be willing to exit the stock at rates more attractive than those of the developers.This reduction in the holding period could increase such transactions and in fact, slow down the sales for a developer's inventory unless his pricing is competitive. However, the quantum of impact will depend on the view one takes on the applicability of this change.“
The deferment of capital gains tax on JDAs (Joint Development Agreements) would also help reduce the cost of land for developers. This would provide a great boost for unlocking of land and reduce litigation. Changes in the taxation aspect of JDA will greatly encourage more land owners to partner with developers that will benefit the real estate developers and in turn, is likely to benefit end-consumers.
“All investors who were earlier sitting on the fence to book profits had to wait for a completion of three years to sell it.Now, they can do so in two years. This will not only enhance gains but also increase the absorption of more ready stock, which has been waiting to be absorbed by the private players,“ opines Amit Wadhwani, director, Sai Estate Consultants.
On a concluding note, there might not be an immediate effect on the inventory overhang with change in LTCG tenure; however, with rationalisation of taxation provisions, combined with Pradhan Mantri Awas Yojna (PMAY) and an increased focus of government towards the affordable housing segment, the overall investment sentiment for the real estate sector is expected to improve, which might result in fresh demand in the sector.