A few high-net-worth individuals (HNI), including several Bollywood celebrities, have sold their properties in the Mumbai real estate market this month. Tax experts opine that while possible motives for HNIs selling properties differ from investor to investor, the key reasons could be healthy returns over a period of time or booking profits from real estate to set off capital gains against the loss in the stock market.
HNIs generally invest in shares and the property market. While a bearish sentiment has prevailed in the Indian stock market for a few months, real estate prices have shot up. Therefore, a probable reason investors are selling their real estate assets is to offset the long-term capital gain on the sale of property against the long-term capital loss on the sale of shares, they say.
Here’s what changed for LTCG in Budget 2024-25
Finance Minister Nirmala Sitharaman had in Budget 2024-25 proposed to lower the long-term capital gains tax on real estate to 12.5% from 20% but without the indexation benefit. The government later decided to amend the LTCG tax provision for real estate after the new provision was criticized for raising tax incidence and disincentivizing investments in the real estate sector.
Indexation benefits allow taxpayers to arrive at the cost price of the property after adjusting for inflation.
On August 7, 2024, the government amended the long-term capital gains tax provision on immovable properties, allowing homeowners to choose between a lower tax rate of 12.5% without indexation or a higher rate of 20% with indexation for properties acquired before July 23, 2024.
Also Read: Big relief for homeowners as government gives options on long term capital gains tax
Here’s what tax experts have to say about HNIs selling properties
Vivek Jalan, Partner at Tax Connect Advisory, a multidisciplinary tax consultancy firm, said that most HNIs have invested heavily in shares over the last one or two years. Property investments have also been made over time.
“The current scenario is that while the share market has tumbled over the last six months and many shares have lost more than 10%, real estate prices have shot up. Hence, it is an opportune time to arbitrage and set off the long-term capital gain on the sale of property against the long-term capital loss against the sale of shares. This will result in a saving of 12.5% in taxes flat,” he said.
Jalan cited an example where an HNI may have sold shares of Rs.100 crores for a loss of Rs. 10 crores and later sold a property of Rs. 100 crores for a profit of Rs.10 crore. This may lead to a tax saving of ₹1.25 crore on the capital gain, assuming that both fall in the long-term category.
Neetu Vinayek, Partner and Tax Infra leader, EY India, said, “While the Housing Price Index (HPI) reflects that in-general Mumbai Metropolitan Region (MMR) real estate property prices have grown at a moderate pace in past few years, in select pockets, especially in premium and luxury housing, it has witnessed significant growth. This could be one reason that people with long-term gains may want to exit the investments and book the gains. Although the market report does not suggest such, investors may also be slightly wary of the potential increase in the LTCG tax rate from 12.5% (reduced from 20% in July 2024) or complete withdrawal of indexation benefit.”
“Under income-tax, short-term capital loss can be offset against long-term capital gains. In recent weeks, the midcap index has seen close to 10% fall over the last month. Booking and off-setting these losses from recent investments against long-term gains from the sale of properties could potentially be a good commercial strategy,” Vinayek said.
“In addition, a tax harvesting strategy may also be deployed where taxable gains from a property sale are immediately again deployed in the stock market for long-term gains. However, this strategy comes with a slight cost so far that short-term loss, which could otherwise provide a potential % tax break of 20%, is offset against long-term gains taxable at 12.5%. At the end of the day, it is a math aspect which one needs to see from the perspective of an individual’s long-term portfolio goals,” Vinayek said.
Real estate consultants, however, believe that price appreciation may be the reason why HNIs are booking profits through property sales.
“There are two reasons why HNIs, including Bollywood stars, maybe booking profits by selling their properties. The first reason could be purely due to property appreciation; investors have seen good returns due to which they are selling and booking profits,” said Jayesh Rathod, co-founder and director of The Guardians Real Estate Advisory.
“The second reason could be the stock market gains, which have decreased in the last few months. Due to this, investors might be booking profits from real estate to set off capital gains against the loss in the stock market. These are just possible reasons, as motives for selling or exiting are subjective from the investors’ point of view,” Rathod added.