Mumbai Market Faces Impact from LTCG Tax Change

The Mumbai real estate market is poised for a significant adjustment following the recent budget proposal to eliminate indexation benefits on long-term capital gains (LTCG) from property sales. Union Finance Minister Nirmala Sitharaman’s announcement on July 24 has drawn sharp reactions from industry experts, who predict that the change will lead to heightened tax burdens and potentially slow down property transactions in the city.

Under the current framework, indexation allows property sellers to adjust their gains for inflation, thereby reducing their taxable income. The new proposal will replace the 20% LTCG tax rate with a lower 12.5% rate, but without the indexation benefit. This shift is expected to increase the effective tax rate for many sellers, as they will no longer be able to adjust the purchase price of their assets to account for inflation.

The impact of this policy change is likely to be particularly pronounced in Mumbai’s resale market, which is heavily influenced by buyers looking to upgrade to larger homes. Experts suggest that the removal of indexation benefits could dampen activity in the secondary market, as potential sellers may be deterred by the prospect of higher tax liabilities. “The real estate market in Mumbai and other metro cities may experience a slowdown in resale transactions,” said a spokesperson from JLL India.

“The mid-segment market, especially properties priced between INR 2 crore and INR 5 crore, could see a significant impact. Investors are likely to reassess their selling decisions and may delay exits until the market stabilises.” Additionally, the upcoming state assembly elections in Maharashtra could further contribute to market stagnation. With investors and developers adopting a cautious stance, the real estate sector may experience a temporary lull as market participants wait for political and economic uncertainties to resolve. Despite these challenges, experts believe that the market may eventually adjust to the new tax conditions.

“There could be a short-term impact as the market recalibrates,” said a spokesperson from Knight Frank India. “However, we anticipate that conditions will normalise over time.” Investments in plotted developments have seen a resurgence post-COVID-19, but the impact of the LTCG changes on these segments appears to be similar to that on vertical developments. “The recent tax changes offer greater flexibility for investors looking for short-term exits, although long-term holdings still remain advisable,” noted a spokesperson from House of Abhinandan Lodha (HoABL).