- The effective Tax rate for Long Term Capital Gain (LTCG) including surcharge and cess has been proposed to 14.95% from 23.92%.
The real estate sector in India has long struggled with the issue of cash transactions, particularly during land purchases. Government-assessed rates, commonly known as jantri rates, average around 30% of market rates in most regions. Only a few states have jantri rates that align closely with market values. This disparity often leads landowners to underreport transactions to reduce tax liability, resulting in deals being finalized at jantri rates. As a result, developers often have to use cash to complete land transactions. To recover these cash payments, they, in turn, demand cash from home buyers. When these home buyers later sell their properties, they also seek to recover the cash portion they initially paid, creating a cycle of cash transactions within the sector.
The introduction of a new Long-Term Capital Gains (LTCG) tax rate of 12.5% offers a promising solution. This attractive rate may incentivize landowners to opt for 100% cheque payments and willingly pay the 12.5% tax. As a result, developers would no longer need to generate cash to compensate landowners, allowing home buyers to engage in clean transactions without involving cash. This shift towards 100% cheque transactions could significantly increase state government revenue from stamp duty and registration charges, potentially providing an opportunity for the state government to reduce these charges. Moreover, jantri rates would become less relevant in this new, more transparent system.
For home buyers, the new LTCG rates are tax neutral. While the government has removed the indexation benefits, they have retained the benefits under Section 54. This means that if a homeowner sells their property and incurs capital gains, they can avoid paying any capital gains tax by reinvesting those gains in a new house.
Eliminating cash transactions in the real estate sector could yield numerous benefits. Developers, home buyers, and landowners would all prefer clean transactions, promoting greater transparency and trust. In the long term, this change could significantly benefit the real estate sector, attracting new investors such as mutual funds, banks, high-net-worth individuals (HNIs), and foreign institutional investors (FIIs).
The new LTCG tax rate could be a game-changer, fostering a more transparent and efficient real estate market in India.
