Budget 2024: Nifty Realty tanks after removal of indexation benefits; DLF top loser

The real estate sector was one of the worst performers on July 23, following the announcement in the Budget 2024 to remove indexation benefits associated with the sale of property. The Nifty Realty index fell nearly 2 percent, contrasting with a flat Nifty.

During her budget speech, Finance Minister Nirmala Sitharaman announced a reduction in Long Term Capital Gains (LTCG) Tax on property sales from 20% to 12.5%. However, the budget fine print revealed the removal of indexation benefits previously available for property sales.

"With the rationalisation of rate to 12.5%, indexation available under second proviso to Section 48 is proposed to be removed for calculation of any long-term capital gains, which is presently available for property, gold, and other unlisted assets. This will ease computation of capital gains for the taxpayer and the tax administration," the budget document stated.

All Nifty Realty constituents were trading in the red. DLF was the worst performer, dropping almost 5 percent. Sunteck Realty, Macrotech Developers, Brigade Enterprises, and Godrej Properties each fell around 4 percent. Oberoi Realty, Prestige Estates, Sobha, and Phoenix Mills also saw losses of up to 3.5 percent each.

Indexation adjusts the purchase price of an investment to account for inflation, effectively reducing taxable profits. Without indexation, the taxable income from long-term capital gains increases, leading to higher tax liabilities for investors.

“This proposal may not sooth taxpayers goosebumps as the proposal, in the garb of simplification, largely skews towards heightening tax rates in certain instances,” said Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP, regarding the overall LTCG proposals made in the Budget 2024.

The real estate sector's reaction reflects concerns over the increased tax burden and its potential impact on investment returns. The removal of indexation benefits, despite the lower LTCG rate, appears to have overshadowed the positive aspects of the tax cut, leading to significant declines in real estate stock prices.

Apart from tax changes, Finance Minister Nirmala Sitharaman announced several initiatives in the Budget 2024 to support the real estate sector. A significant allocation of ₹10 lakh crore will assist 1 crore poor and middle-class families in purchasing homes, and is expected to drive demand for residential properties and stimulate construction activities. The budget also earmarked ₹2.2 lakh crore for urban housing over the next five years, providing further support to the sector. Additionally, the proposal to develop investment-ready "plug and play" industrial parks in or near 100 cities aims to attract industrial investments and increase demand for industrial real estate. These measures are set to benefit developers, construction companies, and various stakeholders in the real estate industry.

“The Finance Minister's allocation of ₹10 lakh crore to help 1 crore poor middle-class family buy houses will boost the demand for residential properties. This funding, along with interest subsidies, will greatly benefit real estate developers like DLF, Macrotech Developers, NBCC, and Sunteck Realty, as well as housing finance companies focused on the lower and middle classes, such as Aadhar Housing Finance, Aptus Value Housing Finance, and Aavas Financiers,” said Divyam Mour, Research Analyst , Samco Securities.