India’s Capital Gains Tax Levy To Affect Dubai’s Property Market

The proposed eradication of the capital gains tax holiday on overseas residential property investments made by Indians will affect Dubai’s residential property market, according to Cluttons, a global real estate consultancy.

The move, which is a part of the latest Indian budget, looks to mark the end of a tax-free regime for Indians who want to capitalise on residential properties overseas, spelling doom for property markets such as Dubai that receive a healthy dose of investments from Indian buyers.

“While the sudden reintroduction of a 20 per cent capital gains tax rate change will no doubt trigger greater scrutiny of international residential investments by Indian investors, it will result in a recoiling of global investment activity by Indians on a scale that is likely to have a significant impact on many markets,” the company said in a recent note.

Coinciding with Dubai government’s efforts to cool down the property market, such a step will mainly slow down short-term growth in the emirate’s residential property market, experts say.

“Indian nationals were the largest group of buyers in the Dubai residential market last year and remain amongst the largest cohort of investors in the emirate,” said Faisal Durrani, Cluttons’ London based International Research and Business Development Manager.

“The ending of the period of tax-free property trading for this group will of course further deter ‘property flipping’, which could have a knock on effect on the residential market’s growth in the short term, while Indian investors assess their options.”

Indian investors poured almost Dhs5.8 billion into Dubai’s property market during Q1 2014 contributing to the biggest bulk of foreign investment in the sector, according to Dubai Land Department.

However, Indian property buyers in other Gulf countries such as Oman seem to be unaffected by the removal of a tax gain holiday.

According to the consultancy, Indian investors, especially non-resident Indians in Dubai, are increasingly targeting to buy retirement homes in the Sultanate’s capital city Muscat.

“These investments are however far more long term as they appear to be driven by the ability to secure residence visas on the back of their property investments,” it said in the note.

“This trend is particularly noticeable amongst non-resident Indians based in Dubai, where regulations surrounding retirement homes remains a grey area. Muscat’s relative proximity to Dubai and excellent road and air-links have helped to heighten the appeal of owning a home in Oman.”

Despite its impact on Gulf markets, Durrani said that it was still unclear as to how the Indian government will implement the proposed tax change and how they plan to monitor overseas property transactions by Indians.

“Current regulations mean that international investors are locked in to India-based real estate investments for a period of three-years, after which they are faced with a 20 per cent capital gains tax, should they liquidate their investment,” he said.

“Creating capital gains tax bands that are linked to the length of real estate investments would not only reward longer periods of investment, but also dramatically boost the appeal of India to the international investment community.”