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LTCG Tax Likely To Boost REIT Investor’s Return Expectation




A proposal to cover units of business trusts under the new Long Term Capital Gains Tax is introduced in the Union Budget 2018-19, with an aim to push the investors’ return expectations from Real Estate Investment Trusts (REITS) higher. Arun Jaitley, the finance minister has proposed to tax long term capitals gains of over Rs 1 lakh at 10% without indexation benefit in his budget 2018. The capital gains arising from not only the unit of an equity oriented fund or the transfer of equity shares, but also units of a business trusts be covered under the new tax.


According to the PwC India, the REIT investors would have to factor the Long Term Capital Gains Tax, while evaluating the investment opportunities, increasing the return expectations.


REITs are basically the companies that own or finance income-producing real estate in a range of property sectors. In order to qualify as REITs, these companies have to meet a number of requirements. Most of the REITs trade on major stock exchanges, offering a number of benefits to the investors.


Anyone interested in investing in portfolios of real estate assets are allowed by the REITs in the similar way they invest in other industries, that is the through a mutual fund or exchange traded fund (ETF) or through the purchase of individual company stock. The stockholders of a REIT, without actually having to go out and buy, manage or finance property, are able to earn a share of the income produced through real estate investment.


According to the government, the proposed long-term capital gains tax on equity holdings will apply on profits made from sale of shares on or after April 1, 2018. While the tax starts to kick in on shares sold on or after April 1, the acquisition cost for the purpose of computing the capital gains will be on the increased side to the maximum price or the actual purchase price on January 31.


The capital market regulator Securities & Exchange Board of India (SEBI) and the government has been making efforts for long to attract REIT proponents for listing their trusts. However, the process notifying about the regulations in 2014, started much earlier of the SEBI and is yet to see any REITs listing.


The last year’s announcements such as allowing banks, mutual funds and insurance to invest in these instruments have certainly pushed the real estate companies’ interest level higher. One of the factors that falls under the state government’s jurisdiction is the rationalization of stamp duty, that remains a key challenge for REIT listings.


According to estimates and reports, Indian real estate is likely to provide investment opportunity worth up to $77 billion through REIT-eligible retail properties and commercial office, across the country’s top seven cities by 2020.


As the REITs are gradually being introduced, large global as well as domestic institutional investors have already started increasing their exposure to commercial office assets. A liquidity option is expected to be provided to the commercial developers by the REITs and also the retail investors will get a chance to participate in office realty market’s growth.

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