With indexation gone, is investing in property still profitable?

For context itrsquos the economic policy designed by the Reserve Bank of India that governs the majority of the national economy while the union budget recently released by Finance Minister Nirmala Sitharaman deals with taxation and nextgeneration reformsFrom a real estate point of view the first thing that stands out in this budget is the continued focus on infrastructure with an allocation of over INR 1111 lakh crore nearly 34 percent of Indiarsquos Gross Domestic Product GDP Experts agree that improved infrastructure is set to drive real estate growth yet there rises is a looming threat for developers with new reformsCitybased investment banker and financial strategist Rajeev Kashikar remarks that ldquothe new budget has ripped the real estate industry The removal of indexation in calculating profits from real estate sales is a significant setbackrdquoTo dig deeper into the impact of Union Budget 2024 on the real estate industry Middaycom sought advice from Mumbaibased realty experts who offer a deeper insight into the effects of the Union Budget 2024 on the industry and what the new reforms entail for themEnd of indexation Pain for homebuyersWhen it comes to Mumbai Kashikar explains that indexation is the most important tool The Brihanmumbai Municipal Corporation BMC introduced it in 1973 while other cities adopted it around 1015 years agoThe end of indexation will lead to higher real estate prices making properties more expensive for buyers This change comes as the government closely monitors the real estate markets seeking to benefit from their growth As developers pass the tax burden onto buyers it will also affect the property loan industry creating a ripple effectldquoWe refer to this as the lsquodomino effectrsquo Property prices will rise particularly affecting the middle class By removing indexation the government increases taxes on real estate transactions thereby generating more revenue from the sectorrdquo outlines KashikarFurther elucidating the math behind it here is an example Lets say the original cost of a property is 1 lakh and it sells for 10 lakhs Under the new rules the profit to the seller would be 9 lakhsrdquoPreviously the indexed price which is specific to a location was used to determine the cost In the same example lets assume the propertys indexed price is 5 lakhs regardless of the original price If it sells for 10 lakhs under the old method the gain would be calculated as 10 lakhs selling price minus 5 lakhs indexed price resulting in a net gain of 5 lakhs Taxes would then be paid on this 5lakh gainAs evident the new reforms in the budget pose a bigger sum to be paid taxed on as the indexation has been eliminated In this example the gain for the same transaction will be determined to be 9 lakh and tax will be paid on this 9 lakh gain However experts opine that developers will find a way to extract this taxed amount from homebuyersRelief for homebuyers if anyTo balance rising property taxes Anuj Puri Chairman of Anarock Group shares that the focus on rural and urban job creation if effective may provide some boost to affordable housing which has given a tepid performance since the pandemic The move can help stir up housing demand in not just the top 7 cities but also the tier 2 and 3 citiesWith an eye on the housing needs of the urban poor and the middle class the government has announced that it intends to construct an additional one crore homes under Pradhan Mantri Awas Yojana PMAY Urban 20 with an outlay of INR 10 lakh croreHe stresses that mega allocation for the HyderabadBengaluru industrial corridor and VizagChennai corridor will boost growth along these corridors and consequently boost real estate growth there The FM also tried to rejuvenate the MSME sector which does have a multiplier effect on overall economic growth ndash with the implied positives for real estate as a collateral beneficiaryThe credit guarantee scheme for the MSMEs will help provide impetus to overall industrial development and this can have a ruboff effect on the real estate sector The pandemic had a catastrophic impact on the MSME sector which slowed down the demand for affordable housing since 2020 Affordable housing demand may gain momentum once the economic impact of the pandemic subsides for this target audienceThe affordable homes category ltINR 40 lakh Puri points out has been seeing a decline in overall sales since the pandemic to approx 1937 in H1 2024 from over 3837 in the period before the pandemic in 2019 Consequently this segmentrsquos percentage share of the total housing supply in the top 7 cities also fell to 1837 in H1 2024 from nearly 4037 in 2019 Any boost to this vital segment is therefore welcomeFor individual taxpayers taxpayers under the new tax regime the increased standard deduction limit to INR 75000 from the previous INR 50000 along with the new income tax slabs implies savings but hardly enough to boost housing demandHeeralal Doshi founder and chairman at Kinjal Group adds that Infrastructure investments will be facilitated via Viability Gap Funding and Phase IV of the PM Gram Sadak Yojana will connect 25000 rural habitations Dormitorytype rental housing for industrial workers in PPP mode will also be facilitated The government plans to develop corridors in Gaya modeled after the Kashi Vishwanath corridor ensuring strong fiscal support for infrastructure projects over the next five yearsrdquoHow will developers recoupldquoMumbai will be affected the maximum as the developers will rework their economics Industry may lobby for some concessionrdquo predicts KashikarIt will be interesting to observe the reactions of real estatefocused private equity funds to this taxation method as it will affect the posttax internal rate of return IRR on their investments IRR which measures the internal rate of return both pretax and posttax is a crucial metric for investorsThis change could impact private equity funding for the real estate industry particularly when comparing posttax IRR across emerging markets such as India the Philippines Vietnam Thailand Indonesia and others If the riskadjusted IRR from other markets is higher than the average riskadjusted IRR in India investors are likely to shift their funds from India to those markets This could be the most significant impact addsAlso read