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Sonam Kapoor's Bandra flat sale sparks discussion on whether real estate gives return. Does it?

Bollywood actress Sonam Kapoor with her husband Anand Ahuja (ANI (File photo))Premium
Bollywood actress Sonam Kapoor with her husband Anand Ahuja (ANI (File photo))

  • Bollywood actress Sonam Kapoor who bought her Bandra-Kurla Complex home in Mumbai in 2015 sold it on December 29, 2022, for over 32 crore. But the point of discussion was the amount for which she bought the property! Know the taxes and investment math here

Investing in real estate has dual benefits - one is for utility as a home or as rental income and second is as investment asset class for long-term wealth creation. It is not uncommon in India that buying a house is among the many million dreams that individuals hold. Recently, Sonam Kapoor's sale of property in Mumbai's prominent upscale commercial hub Bandra Kurla Complex (BKC) sparked a discussion on whether real estate makes sense as an investment or not.

Bollywood actress Sonam Kapoor who bought her BKC flat in 2015 sold it last week on December 29, 2022, for approximately over 32 crore. But that's not the point of discussion on real estate's potential for giving returns. It was the amount for which she bought the property!

Stock analyst Aditya Shah tweeted on Thursday that "Real Estate always does not make money!" He gave an example of Sonam Kapoor's Bangalore flat which was bought for 31 crore in 2015 and sold for 32 crore in 2022. The gain is seen as somewhat around 1 crore.

This immediately led to Twitteraties sharing their opinion on the tweet and many disagreed with the idiom “real estate not making money"; some even trolled the actress. 

Aman Goel co-founder of AI-driven Omnichannel Cloud Communication-as-a-Service company, Cogno AI replied saying, "It does when you're doing it for a Capital Gains exemption (Section 54)," adding, "above 5 crore of Capital gains, the LTCG is 28.49% including surcharge. You can buy and hold the property for 3 years and save all of that by paying just 6 - 7% in stamp duty."

While a user named Rushil R said, "if you factor in the rental yield for the Bandra area from 2015 to 2022 it would be more than the Nifty 50 return."

Further, a tech consultant Arvind Raj said "Real estate in metro will not give higher return than index IMO in coming years," adding, "Better but in tier-2 cities. And quality of life is also good compared to metro (but ease and entertainment will be less than metro)."

Meanwhile, Zorro cofounder Abhishek Asthana, better known as Gabbar Singh also in a cryptic tweet spoke about Sonam Kapoor's Bandra flat sale. He tweeted, "Sonam Kapoor bought a flat in Bandra for 31 CR in 2015, and sold it for 32 CR in 2022," adding, "Smart people will understand what happened."

Let's understand the short-term and long-term capital gains on real estate and tax exemptions on the sale of a property.

According to Income Tax Act, short-term capital assets are any assets held by a taxpayer for a period of not more than 36 months immediately preceding the date of its transfer.

On the other hand, capital assets that are held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer are treated as long-term capital assets.

Notably, the tax rates of capital gains depend on the nature of the gain, i.e., whether short-term or long-term. Hence, to determine taxability, capital gains are classified into short-term capital gain and long-term capital gain. Thereby, the tax rates for long-term capital gain and short-term capital gain are different.

The computation of long-term capital assets is:

The full value of the consideration (sales consideration of assets) - Expenditure incurred wholly and exclusively with the transfer of capital assets = Net sale consideration.

Long-term capital gains = net sale consideration - indexed cost of acquisition - indexed cost of improvement if any.

It needs to be noted that indexation is a process by which the cost of acquisition is adjusted against an inflationary rise in the value of an asset. For this purpose, the cost inflation index has been notified by the government. But the benefit of indexation is available only to long-term capital assets.

Generally, long-term capital gains are charged at a 20% rate plus surcharge and cess as applicable. However, in certain cases such as listed securities, UTI units, or mutual funds, the LTCG is charged at 10% plus surcharge and cess.

Tax Exemptions:

Section 54 of the Income Tax Act is the most popular one to provide relief to residents who are selling their old house. However, it needs to be noted that, section 54 gives relief to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house.

There are certain conditions in section 54 as well. These are:

- Benefit of section 54 applies only to individuals or HUF.

- Asset transferred should be a long-term capital asset, being a residential house property.

- Within a period of 1 year before or 2 years after the date of transfer of the old house, the taxpayer should acquire another residential house or should construct a residential house within a period of 3 years from the date of transfer of the old house. In case of compulsory acquisition, then the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

- Exemption is allowed to claim only in respect of one residential house property purchased/constructed in India

Then comes section 54EC where tax exemptions can be claimed in regards to LTCG from the sale of any property by investing in bonds which are generally issued by infrastructure companies. These bonds are of REC, PFC, NHAI, and IRFC.

Further, section 54GB of the IT Act allows exemption of LTCG on the transfer of residential property if net consideration is invested in equity shares of a new startup before the due date of furnishing the income tax return.

Real estate outlook for 2023:

Sudarshan Lodha, Cofounder & CEO, Strata Property Management said, "We expect the trend to continue and bolster in 2023, with increased absorption and decreased vacancy rates, strong ROI, more considerable NRI, and FDI investment and solidified government initiatives helping infrastructural boost leading to growth in the office space segment. We foresee more traction in Tier-II towns with the rise in employment opportunities and economic activities in these markets."

Additionally, Lodha said, "with a behavioural shift towards digitization, we will see more people investing in commercial assets through fractional routes. Overall, real estate will remain one of the ideal investment asset classes, and as the pandemic has faded, the commercial market looks to bloom in major cities of the country."

Further, Vimalendra Singh, Chief Sales and Service Officer at Mahindra Lifespaces said, "The theme of the year 2022 has been of appreciation. Despite its recent ups and downs, the Indian real estate market has grown, instilling confidence in the minds of homebuyers and investors alike. The desire for homeownership has become stronger ever since the pandemic started and has continued to remain strong."

In regards to rate hike trends and their impact on homebuyers, Singh said, "With RBI increasing repo rates, home loan interest rates saw a rise. However, this has had an almost negligible impact on sales and customer sentiment in the past. Additionally, flexible payment plans from developers have also encouraged home buyers to complete their purchases. This was also the year of the espousal of sustainable and innovative products amongst the new-age environment-conscious homebuyers."

For 2023, Singh added, "the demand and supply dynamics are expected to remain resilient in 2023. Even considering the expectations of another round of rate hikes, the market is likely to respond positively as it has done over the last year. We expect this momentum to continue over the coming year and remain confident of the growth of the industry as a whole."

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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