The High-End Real Estate Conundrum: Eliminating Indexation Benefits
The removal of indexation benefits is set to impact high-end property investments, leading to reduced interest and price appreciation in upscale real estate.
Real EstateHigh End PropertiesIndexation BenefitsTax OutflowsLuxury PropertiesReal EstateJul 27, 2024
One of the significant changes introduced in the recent Budget is the removal of the indexation benefit on the sale of non-financial assets, including real estate. While this move may not have a significant impact on affordable housing with ticket sizes below Rs 70 lakh, as end-users are less likely to trade in real estate, high-end properties will be severely affected. The long-term capital gains tax rate has been reduced to 12.5% from 20%, but the removal of indexation means that properties with an annual rate of appreciation of 13% and above will benefit from reduced tax outflows, while those below it will incur a loss when yearly inflation is taken into consideration.
This change is likely to dampen investor sentiment, particularly in the high-end segments where returns are around 10-11% per annum. The reduction in investor demand could make it challenging to take price hikes in the near term, as investors may be wary of large exposures due to higher tax outflows. However, the grandfathering of property values indexed up to 2001 provides some relief for landowners of ancestral properties.
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, 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% share of all transactions in the first quarter of 2024, up from 16% in the corresponding period of 2019, prior to the pandemic.
The elimination of indexation benefits is likely to have a significant impact on the high-end real estate sector, which has been witnessing heightened activity since the pandemic. With reduced investor interest and price appreciation, the sector is likely to face a challenging time ahead.
Frequently Asked Questions
What is the impact of eliminating indexation benefits on high-end properties?
The elimination of indexation benefits will dampen investor interest in high-end properties and affect price appreciation, leading to reduced returns on investment.
Which segment of real estate will be most affected by this change?
The high-end property segment, with annual returns hovering around 10-11%, will be the most affected by the elimination of indexation benefits.
How will the removal of indexation benefits affect affordable housing?
The removal of indexation benefits is unlikely to have a significant impact on affordable housing with ticket sizes below Rs 70 lakh, as end-users are less likely to trade in real estate.
What is the impact of the grandfathering of property values indexed up to 2001?
The grandfathering of property values indexed up to 2001 provides some relief for landowners of ancestral properties, allowing them to accrue benefits from the new scheme if the CAGR returns are over 11-13%.
What is driving the demand for high-value property transactions?
High-value property transactions are driven by factors such as increased disposable income and changing lifestyle preferences, leading to a growing inclination towards upscale real estate offerings.
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