The budget 2015 announces a rationalization of capital gain tax regime for REITs. This will help to make the vehicle more financially viable for the Indian market. This is a definitely a positive move to push introduction of REITs which are proving to be an efficient and effective investment tool worldwide due to their transparency and liquidity advantages.
REITs were provided a tax pass-through status in last budget. Accordingly, the income generated by trusts would be taxed in the hands of investors, and the fund should be considered a pass-through entity therefore, exempt under income tax. However, industry felt that even with the pass through status, the existing tax structure makes REITs financially unviable for Indian market and were hoping for more exemption and tax incentives.
This step will further push the introduction of REITs also will also provide investors a fixed income instrument which provides inflation hedged returns and capital appreciation.
Currently it is due to the lack of such investment opportunities that savings are channelized into gold and speculative real estate transactions which are unproductive and do not form part of the saving pool and are treated as consumption as part of macro-economic indicators. A publicly traded REIT will convert such un-productive consumption into a productive asset class. Also REITs will ensure full utilization of such assets and un-lock capital not just for corporates and real estate developers but more importantly for public sector institutions. This will therefore result in formation of capital assets leading to better productivity and greater employment.
Overall, it's a sensible budget for real estate focused on core areas like housing, real estate investment trusts (REITs) and approval process.
Author: Surabhi Arora, Associate Director, Research