Budget 2019’s capital gains proposals can boost the property market

[] We examine the interim budget 2019’s proposal to extend the tax benefits on long term-capital gains to two residential properties, on the sale of one residential property and the impact it will have on home buyers and the property market

The sale of immovable property, which is held by an individual for more than 24 months, attracts long-term capital gains (LTCG) tax of 20 per cent on the profit (net consideration minus expenses incurred towards sales and purchase, indexed cost of improvements and indexed cost of acquisition).

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In the budget 2014-15, it was clarified that only one house could be purchased or constructed from the capital gains, to claim exemption on LTCG tax. “This restricted reinvestments into the real estate sector and prompted home buyers/ investors to look for other avenues, such investment in specific bonds and capital account schemes, to save tax,” says Abhinav Joshi, head of research, CBRE India.

Budget 2019-20 proposals on long-term capital gains from property

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However, the recent announcement of rollover of capital gains in budget 2019-20, has relaxed the restriction of investing in one property to two properties, which will encourage home buyers and investors to invest in the sector. This is a welcome decision that allows long-term capital gains arising from the sale of one residential property, to be invested in two residential properties, with the total capital gains being up to Rs two crores. However, this benefit can be claimed only once. Industry experts point out that this will be advantageous for people in tier-1 cities, where real estate costs are much higher, as compared to other parts of the country.

[] Budget 2019 highlights: What did home buyers and the real estate sector gain

Home buyers welcome changes in long-term capital gains reinvestment rules

Kiran Poddar, who stays in a one-BHK flat in Dadar, Mumbai, is happy with the announcement in the budget. “With the family growing, we were looking for a bigger property in Dadar but budget was a constraint. So, we were open to shifting to areas like Chembur and Govandi. With this new policy, I can sell my one-BHK and possibly invest in two residences – one in Chembur/Govandi, which will be our primary house and another one-room-kitchen in Khopoli or Lonavala, which will serve as a second home that we will lease out. It is a very good arrangement that has come at the right time and we will make the most of this policy,” says Poddar.

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Another example, is that of Shirin and Sabha Khan, who own a three-BHK in Andheri. “Both of us do not stay in Mumbai and we were toying with the idea of selling this family property and investing in something of our choice. This announcement in budget 2019, will help us sell the property and invest in two different properties of our choice, in the configurations that we are looking at,” says Shirin Khan.

According to Aditya Kedia, managing director of Transcon Developers, the proposed changes in the budget, vis-à-vis capital gains, will definitely encourage people to invest in housing. “People who were earlier hesitant to buy a house, can invest in a second house that can be used for income generation in terms of leasing out. People can buy one house in the city limits and with the remaining funds, they can buy one outside the city limits. If they have the budget, they can buy both houses in the city limits. This will definitely help them balance their portfolios,” maintains Kedia.

Long-term capital gains exemption for two properties: Impact on the real estate sector

As this move will encourage people to purchase two residential properties, it could further push the recovery of the real estate market. “The existing restriction that requires that the investment in the new house be made within two years, will ensure that the capital gains are invested either in completed homes or residential developments that are nearing completion, which will help in reducing unsold inventory,” concludes Joshi.

Long-term capital gains: Provisions in the interim budget 2019

  • The interim budget 2019 has proposed that the exemption on long term-capital gains tax accruing from the sale of one residential property, be available for re-investment in two residential properties, with the total capital gains being up to Rs two crores. This benefit can be used once in a lifetime.
  • The net capital gains are allowed for reinvestment in the real estate sector (plot/ apartment/ construction of a house) for purchasing a new property, either one year before the sale or two years after the sale of the property. The gains can also be invested in the construction of a property but its construction must be completed within three years, from the date of sale and can be tax-exempted under Section 54.

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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