New Tax Rules for Property and Gold Investment Affect Real Estate and Precious Metals

Finance Minister Sitharaman's 2024 Budget removes indexation benefits for LTCG on property and gold, setting a flat 12.5% tax rate. This change aims to simplify calculations but may shift investor preferences towards equities, potentially impacting real estate investments.

Another major change in the Union Budget 2024 announced by the Finance Minister Nirmala Sitharaman which may bring a shift in long-term investment planning in the real estate and gold asset classes is the changes in the long-term capital gains tax regime. The government has suggested that indexation should not be allowed for calculating LTCG on property, gold and other so called ‘embedded goods’; at a time it has also decided to halve the tax rate from 20% to 12.5%.

The new 12. 5% flat rate without indexation was designed to reduce complexity of taxation and make it easier for everyone – taxpayers and administrators. But later on, the officials at the Finance Ministry stated that there would be indexation allowance up to the year 2000 for the old real estate investments, which would in some way ease the burden on those who held property for a long time.

Performance of these changes will therefore depend on inflation rates and property prices. Again, where there is low inflation and very high property value appreciation, it may benefit the sellers better when the new system is implemented. On the other hand, in situations where the value of an asset has not been appreciating at the same pace, it is quite possible that the old system was actually more favourable.

Analysts have postulated that this change could alter investor preference and redirect them to equity markets where LTCG tax rates are similarly leveled but transactions are more fluid. However, some argue that the large scale real estate investors especially those using cash may be able to persue their property investments.

However, it is also important to mention that the changes described above are still acceptable for the residential property sellers to claim exemptions for reinvesting under Section 54 of the Income Tax Act for another residential property.

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While the real estate sector is still trying to come to terms with these new tax provisions there have been voices raised on the possibility of ‘black money’ circulation coming into play. It is important to note that the full effects of such shifts in the tax framework on investment behaviour and the property market have not been fully manifested, given the dynamics of investor’s reactions towards the new tax reality.