The removal of indexation benefits has dented sentiments and is expected to take the sheen away from the much-sought after real estate sector as an asset class. And possibly encourage the return of black money.

Though first time home buyers, looking for end use, are likely to shrug that fact off, while making a purchase decision, speculative buying however is expected to be hit.

Home Sales Boomed In Post-Covid Phase

According to the just released Economic Survey, in 2023, residential real estate sales in India were at their highest since 2013, witnessing a 33 per cent year-on-year growth, with a total sale of 4.1 lakh units in the top eight cities alone.

The spike in demand has continued in the current financial year until now. In the first quarter of 2024, the segment registered a growth of 41 per cent with record-breaking sales of 1.2 lakh units.

“New supply has consistently exceeded one lakh units since Q2 of 2022, underscoring persistent demand-supply dynamics in the housing market,” the Survey said, adding that with increasing urbanisation, the housing industry is poised for a significant transformation.

So Why Remove Indexation Benefits?

Sitharaman’s aim may have been to focus more on the mid segment and affordable housing while encouraging genuine home buyers by reducing speculation, which is leading to an unprecedented price surge.

The Finance Minister removed the indexation benefit -- which allows determination of the tax rate based on inflation adjusted price of a property -- but simultaneously reduced the long term capital gains tax rate to 12.5 per cent from 20 per cent.

Even then, the lack of indexation benefit will alter the calculations of the overall tax structure.  

What Would Be The Hit?

The impact, to say the least, has been a dampener. Not only will this impact the real estate sector but could have a deeper bearing on the economy.

According to Anarock Property Consultants, the move could potentially lower demand from investors since indexation adjusts the purchase price for inflation, thereby reducing capital gains tax on property sales.

“Sans this benefit, the tax liability increases. And this will reduce the attractiveness of real estate as investment when viewed against other asset classes,” it said in a note.

“This measure could actually result in losses for people who wish to sell their properties simply because inflation, a basic economic foundation, will no longer be adjusted,” Dhirendra Kumar, CEO Value Research, told The Secretariat.

“The value of Rs 100, 10 years ago was different from what it is today…inflation adjustment is key for reaching an appropriate price for properties,” Kumar said.He added that an individual should be allowed to choose whether she prefers to use the property as an investment or to live in.

Analysts and legal luminaries argue that whether the person uses a house to live in or uses it for investment purposes is his/her personal choice. "The individual should have the right to decide,” Kumar said.  

The announcement could lead to a slowdown in home demand, which may have larger implications for the country’s economic growth.

Return Of The Cash Economy

Importantly the move could lead to a larger cash economy, something that will cause serious embarrassment for the NDA government that brought about the demonetisation exercise in 2016 primarily with the objective of ending the black economy.

“The move is unfair and naturally this could once again lead to increased cash component in real estate dealings,” Kumar said.

The Indian real estate sector has traditionally been marked for its murky dealings which include cash transactions. A study conducted by LocalCircles in 2021 revealed that cash dealings in the real estate segment have continued even after the demonetisation exercise.

As per the survey, a majority of the respondents used cash for real estate purchase. About 70 per cent used cash for part payment for the real estate transactions. About 16 per cent said that they paid more than half of the total amount in cash.

And now the latest decision to do away with the indexation benefits could further increase cash circulation in the real estate segment , analysts felt.

Despite circle rates being fixed for properties depending on the cities and the location, a large chunk of transactions take place at either higher or lower rates.

Circle rates of properties, decided by the state government depending on various factors including the location and amenities, are used to determine the registration amount or stamp duty.

“Circle rates are fixed but most transactions, especially in the bigger cities such as Delhi, take place at higher prices.

"The move will adversely impact the home segment though in case of a resale of a property which has been purchased just two to three years ago, will not be impacted much by the new announcement,” Amarjit Chopra, former president, Institute of Chartered Accountants of India (ICAI) told The Secretariat.

The well-known chartered accountant said that though the removal of the indexation benefit will not have a significant impact on resale of the properties purchased recently, the move has led to confusion and anxiety among possible customers.

“The impact would be particularly felt by those wanting to sell properties bought sometime ago…but this move overall is regressive,” he said.

Importance Of A Well Functioning Realty Sector   

The implementation of the Real Estate Regulation and Development Act (RERA) in 2016 injected transparency while reinforcing confidence into the sector, after it was significantly tarnished by several small developers failing to deliver homes in time leaving customers in distress.

The economic recovery, post Covid, along with a growing middle class has led to rapid urbanisation. And the demand for homes has risen exponentially.

“Just when the real estate sector was beginning to pick up steam in a country like India which needs more homes at this stage, the controversial move could well put a brake on the growth of this segment,” Chopra said.

A well functioning real estate is key for the economy. Besides creating direct and indirect jobs, the sector is crucial for several other industries such as steel, cement, paints and home furnishing among others, thereby supporting the overall economy.

Spike In Home Loans

The spike in home sales has led to a surge in real estate prices as well as housing loan. Quoting a Crisil report, the Survey said that in India home loans grew at a CAGR of approximately 13 per cent from 2017-18 to 2022-23.

It is expected to continue growing at a CAGR of 13 to 15 per cent touching Rs 42 lakh crore to Rs 44 lakh crore by next financial year.

Concerns for the Reserve Bank of India (RBI) however have been rising with the spike in disbursement of personal loans driven by home credit segment.

Outstanding credit in the home segment stood at Rs 27.22 lakh crore as of March 2024. It was Rs 17.26 lakh crore at the end of March 2022.

Notwithstanding the growth in real estate, India’s real estate sector accounts for just about 7.4 per cent of the GDP.

One of the larger issues that has also raised concerns is the growth in the premium segment. The affordable housing segment is yet to witness a spike in demand and now with this move, the rent- favouring millennials could well stay away from investing in a home.