The Union Budget 2024 introduces significant changes to the capital gains tax framework for Real Estate Investment Trusts (REITs), which are poised to reshape the investment landscape. These amendments impact both listed and unlisted units of REITs, altering holding periods, tax rates, and exemptions, while aiming to align the taxation of REITs with other investment vehicles like equity shares.

Current Provisions

The existing tax framework for REITs differentiates between listed and unlisted units, with distinct holding periods and tax rates:

1. Holding Period for Listed Units: Currently, Section 2(42A) mandates a holding period of 36 months for listed units of REITs to qualify as long-term capital assets. In contrast, listed equity shares require only a 12-month holding period.
2. Holding Period for Unlisted Units: Unlisted units of REITs are required to be held for 36 months, compared to 24 months for unlisted equity shares.
3. LTCG Tax Rate on Listed Units: Under Section 112A, long-term capital gains (LTCG) arising from the transfer of listed units of REITs are taxed at 10%, plus applicable surcharge and cess. Gains up to INR 1,00,000 are exempt.
4. LTCG Tax Rate on Unlisted Units: For unlisted units of REITs, the LTCG tax rate is 20% with the benefit of indexation. Non-residents are taxed at 10% without indexation benefits, with all rates subject to applicable surcharge and cess under Section 112.
5. STCG Tax Rate on Listed Units: Short-term capital gains (STCG) from the transfer of listed units of REITs are taxed at 15% plus applicable surcharge and cess, as per Section 111A.

Proposed Amendments – Effective from 23 July 2024

The Union Budget 2024 proposes several pivotal changes to the taxation of REITs, which include modifications to the holding period, tax rates, and exemptions:

1. Reduced Holding Period for Listed Units: The holding period for listed units of REITs to qualify as long-term capital assets has been reduced from 36 months to 12 months. This change aligns the holding period with that of listed equity shares, potentially increasing the attractiveness of REITs to a broader range of investors.
2. Reduced Holding Period for Unlisted Units: Similarly, the holding period for unlisted units of REITs has been reduced from 36 months to 24 months. This reduction brings the holding period in line with unlisted equity shares, fostering greater liquidity in the market.
3. Increased LTCG Tax Rate on Listed Units: The LTCG tax rate on listed units of REITs has been increased from 10% to 12.5%, plus applicable surcharge and cess. Despite the rate increase, the exemption limit for LTCG on listed units has been raised to INR 1,25,000, providing some relief to smaller investors.
4. Uniform LTCG Tax Rate for All Investors: For both residents and non-residents, the LTCG tax rate is now uniformly set at 12.5% for all assets, including units of REITs, whether listed or unlisted. Notably, the indexation benefit has been removed, which could have significant implications for the effective tax burden on long-term gains.
5. Increased STCG Tax Rate on Listed Units: The STCG tax rate on listed units of REITs has been increased from 15% to 20%, plus applicable surcharge and cess. This change aligns the STCG tax rate for REITs more closely with other short-term capital gains, ensuring a consistent tax treatment across different asset classes.

Rationalization of Capital Gains on Immovable Property

In addition to the changes affecting REITs, the budget also introduces amendments to the taxation of immovable property, which could have broader implications for real estate investments:

1. Reduced LTCG Tax Rate on Immovable Property: The LTCG tax rate on the transfer of immovable property has been reduced from 20% to 12.5%, plus applicable surcharge and cess. However, this reduction is offset by the removal of the indexation benefit, which previously allowed investors to adjust the purchase price of the property for inflation.
2. Removal of Indexation Benefit: The indexation benefit, available under the second proviso to Section 48 for computing LTCG on immovable property, has been removed. This change could result in a higher tax liability for long-term property investors, particularly for those holding properties acquired before 1 April 2001.
3. Consideration of Fair Market Value: While the indexation benefit has been removed, the fair market value of immovable property acquired before 1 April 2001 will still be considered as the cost of acquisition when computing capital gains, providing some measure of relief to long-term property holders.

TDS Amendments on Rent and Property Transfers

The budget also introduces important changes to the Tax Deducted at Source (TDS) provisions related to rent payments and property transfers:

1. Reduced TDS on Rent Payments: Under Section 194-IB, the TDS rate on rent paid or payable by individuals or Hindu Undivided Families (HUFs) to a resident has been reduced from 5% to 2%, plus applicable surcharge and cess. This reduction, effective from 1 October 2024, aims to ease the tax burden on tenants and landlords alike.
2. Clarification on TDS for Property Transfers: The ambiguity surrounding the TDS on the transfer of immovable property under Section 194-IA has been addressed. The 1% TDS must be deducted where the total consideration exceeds INR 50,00,000, with the aggregate limit considered for all transferors/transferees taken together. This clarification, effective from 1 October 2024, simplifies compliance for property buyers and sellers.

Taxation of Rental Income from Residential Property

The budget also includes a critical amendment to the taxation of rental income from residential property:

1. Taxation Under ‘Income from House Property’: Rental income from the letting of residential property, which was previously taxable either under ‘Income from House Property’ or under the Profits and Gains of Business or Profession (PGBP), will now be taxed exclusively under ‘Income from House Property.’ This change, effective from 1 April 2025, limits the deductions available against rental income, potentially increasing the tax liability for landlords.

Key Policy Announcements and Impact Analysis

In addition to tax reforms, the Union Budget 2024 outlines several key policy announcements that are expected to have a significant impact on the real estate sector:

1. PM Aawas Yojana Urban 2.0: The government has announced an investment of INR 10 lakh crore to address the housing needs of 1 crore urban poor and middle-class families under the PM Aawas Yojana Urban 2.0. This initiative is expected to alleviate housing deficits in urban areas, spur construction activity, and contribute to economic growth.
2. Development of Industrial Parks: The budget also includes plans to develop investment-ready “plug and play” industrial parks across 100 cities, as well as rental housing with dormitory-type accommodation for industrial workers through public-private partnerships (PPP). These initiatives align with the country’s manufacturing goals and are likely to attract private investment.
3. Reduction in Stamp Duty: State governments are encouraged to reduce stamp duty, particularly on property owned by women, as part of the government’s broader land reform agenda. This measure aims to promote property ownership among women and support the development of the real estate sector.
4. Digitization of Land Records: The government will accelerate land reforms through the digitization of land records and the introduction of unique land identification numbers for both urban and rural lands. These reforms are expected to enhance transparency in property transactions and reduce disputes.

Conclusion The Union Budget 2024 presents a comprehensive set of reforms aimed at stimulating growth and investment in the real estate sector. The revised capital gains tax framework for REITs, coupled with the rationalization of taxation on immovable property and key policy announcements, is poised to create a more transparent and investor-friendly environment. While the removal of indexation benefits may increase the tax burden for some investors, the overall impact of these reforms is likely to be positive, driving investment and contributing to the nation’s economic progress.