Real Estate in Budget 2024-25: Key Reforms and the Impact of Indexation Removal

The Union Budget 2024-25, presented by Finance Minister Nirmala Sitharaman, has introduced several significant measures aimed at reforming land policies and impacting the real estate sector. These measures are part of the government's broader strategy to sustain high growth through next-generation reforms, addressing key factors of production: land, labor, and capital.

Land Reform Measures and Collaboration with States

One of the major highlights of the budget is the emphasis on land reform measures, which will be undertaken in consultation with the States. The Finance Minister emphasized the need for a collaborative approach between the Centre and the States to formulate an economic policy framework that includes comprehensive land reforms.

Key initiatives include

Urban and Rural Land Administration: Reforms in land administration, planning, and urban planning, as well as building bye-laws, are set to be prioritized.

1. Urban and Rural Land Administration: Reforms in land administration, planning, and urban planning, as well as building bye-laws, are set to be prioritized.
2. Digitization and Unique Identification: In rural areas, the government plans to assign a unique Aadhaar for all lands, digitize terrestrial maps, survey lands, and establish a land registry. Urban land records will also be digitized to improve the financial management of urban bodies.
3. Funding and Support: A significant portion of a proposed 50-year interest-free loan will be earmarked for these reforms, ensuring that the States have the necessary financial support to implement these changes effectively.

Digital Public Infrastructure for Agriculture

To further enhance land and agricultural productivity, the budget includes the development of Digital Public Infrastructure for agriculture. This initiative, which follows a successful pilot project, aims to cover six crore farmers and their lands within three years, starting with 400 districts this year. This digital infrastructure is expected to revolutionize agricultural practices and land management, providing farmers with better access to resources and information.

Accelerated Irrigation Programme

In support of agriculture and land use, the government will provide funding under the Accelerated Irrigation Programme and other sources, with projects estimated to cost Rs 11,500 crore. This investment aims to improve irrigation infrastructure, ensuring that more agricultural land can be cultivated efficiently, thereby boosting productivity and sustainability.

Uniform Long-Term Capital Gains Tax Rate

The budget also introduces a uniform long-term capital gains tax rate of 12.5% across various asset classes. This change has significant implications, especially for the real estate market:

Removal of Indexation Benefits: Previously, real estate investors benefited from a 20% tax rate with indexation benefits, which allowed them to adjust the purchase price for inflation and reduce their tax liability. The removal of these benefits means that the effective tax rate for real estate investors will now be higher, potentially leading to substantial tax outflows on the sale of real estate properties.

1. Example of Removal of Indexation Benefits

Consider a scenario where an investor purchased a property in 2010 for Rs. 50 lakhs. By 2024, the property's value has increased to Rs. 1.5 crores. Under the previous tax regime, with indexation, the investor could adjust the purchase price for inflation using the Cost Inflation Index (CII).

For example:

• CII for 2010: 167
• CII for 2024: 348

The indexed purchase price would be: 

• Indexed Purchase Price = Original Purchase Price × (CII in 2024 % CII in 2010) =50,00,000 × (348%167​) = 1,04,19,161

The taxable gain, considering indexation, would be: 

• Taxable Gain = Sale Price − Indexed Purchase Price =1,50,00,000−1,04,19,161=45,80,839

With the indexation benefit, the tax liability at a 20% rate would be: 

• Tax Liability = 45,80,839 × 0.20 = 9,16,167

Under the new regime, without indexation, the taxable gain would be:

• Taxable Gain = Sale Price − Original Purchase Price
  =1,50,00,000−50,00,000 = 1,00,00,000

The tax liability at a 12.5% rate would be:

• Tax Liability = 1,00,00,000 × 0.125 = 12,50,000

In this example, the removal of indexation results in a higher tax liability of Rs. 12,50,000 compared to Rs. 9,16,167 with indexation benefits.

Investor Impact

This change is expected to cause investors to reassess their portfolios and strategies, as the increased tax liability could influence investment decisions. Experts warn of far-reaching consequences for the real estate market, including a potential shift in investment patterns and a reevaluation of real estate holdings.

The Union Budget 2024-25 has introduced several key measures aimed at reforming land policies and impacting the real estate sector. By focusing on collaboration with States for comprehensive land reforms, digitization of land records, and development of digital infrastructure for agriculture, the government aims to create a more efficient and transparent land management system.

However, the changes in the long-term capital gains tax regime, particularly the removal of indexation benefits, present new challenges for real estate. These changes are likely to reshape investment strategies and impact the overall market dynamics.

As the reforms and new tax measures are implemented, stakeholders in the real estate sector will need to navigate these changes carefully, reassessing their investment approaches to optimize their portfolios in the new fiscal landscape.