In a move that may come as a setback for real estate investments, the government has proposed capping the deduction from capital gains on investment in residential house under Sections 54 and 54F at Rs 10 crore.
The move, said finance minister Nirmala Sitharaman in her Budget Speech on February 1, 2023, is meant for better targeting of tax concessions and exemptions.
“For better targeting of tax concessions and exemptions, I propose to cap deduction from capital gains on investment in residential house under sections 54 and 54F to Rs 10 crore,” she said.
Exemption under Section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. With effect from Assessment Year 2020-21, a taxpayer has an option to make investment in two residential house properties in India to claim Section 54 exemption.
The existing provisions of Section 54 and Section 54F of the Income-tax, 1961 allows deduction on the capital gains arising from the transfer of long-term capital asset if an assessee within a period of one year before or two years after the date on which the transfer took place purchased any residential property in India, or within a period of 3 years after that date constructed any residential property in India. For Section 54 of the Act, the deduction is available on the long-term capital gain arising from transfer of a residential house if the capital gain is reinvested in a residential house. In section 54F of the Act, the deduction is available on the long-term capital gain arising from transfer of any long term capital asset except a residential house, if the net consideration is reinvested in a residential house, says the Memorandum Explaining the Provisions in the Finance Bill, 2023
“The primary objective of Sections 54 and Section 54F of the Act was to mitigate the acute shortage of housing, and to give impetus to house building activity. However, it has been observed that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections,” it adds.
In order to prevent this, reads the text, it is proposed to impose a limit on the maximum deduction that can be claimed by the assessee under Section 54 and 54F to Rs 10 crore. “The cost of the new asset purchased is more than Rs 10 crore, the cost of such asset shall be deemed to be Rs 10 crore. This will limit the deduction under the two sections,” it says.
Earlier, the exemption under Section 54 was lower of the following:
- Amount of capital gains arising on transfer of residential house, or
- Amount invested in purchase/construction of a new residential property, including the amount deposited in the Capital Gains Deposit Account Scheme.
These new changes will take effect from the first day of April 2024 and will apply in relation to the assessment year 2024-25 onwards. The provisions of sub-section (2) of Section 54 and sub-section (4) of Section 54F that deals with the deposit in the Capital Gains Account Scheme have also been amended.
The Capital Gains Account Scheme, which was introduced in 1988, allows individuals to park their capital gains till they can be reinvested in assets specified in Sections 54 and 54F. This saves us from paying long-term capital gains.
How will the move impact real estate?
The move will disincentivise families to buy multiple properties as a security provision for their children, says Niranjan Hiranandani, vice-chairman, NAREDCO.
“So far, there was no cap on deduction an individual or an HUF can take from gain arising from the sale of a house property or other investments by reinvestment in another house property. In the current Budget proposal, if the investment in new house property is more than Rs 10 crore, the deduction amount will be limited to Rs. 10 crores only,” explains chartered accountant Manish P Hingar, founder at Fintoo.
“It is going to impact the ultra-high-net-worth people as they need to pay long-term capital gain on the sale of house property with big-ticket deals, but it will be not a major setback as you can still take a deduction up to Rs. 10 crore,” he adds.
“The proposed cap on deduction from capital gains on investment in residential houses under sections 54 and 54F to Rs 10 crore can be a big deterrent for the housing industry. We sincerely appeal to the government to reconsider this limit,” says Amit Goyal, CEO, India Sotheby’s International Realty.
According to Kunal Savani, partner, Cyril Amarchand Mangaldas, capping of the long-term capital gains tax exemption on acquisition of real estates is a major speed-breaker for luxury real estate projects.
“Contrary to the intention of these provisions i.e. to mitigate shortage of housing, such provisions exempting capital gains on acquisition of residential house were frequently used by HNI’s/UHNIs for offsetting their gains on sale of prime residential houses or on sale of other eligible capital assets (mainly equity shares). Quite a few unicorn promoters and key management team members holding stock options have taken advantage of these provisions and invested in luxury residential properties,” he says.
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
[email protected]
Related Posts
Long term capital gains tax: Exemption on buying multiple houses.
Indexation: How it affects long-term capital gains tax calculations.
Budget 2017: Provisions for redevelopment projects to bring relief to home owners.
Additional benefit of Rs 1.5 lakhs on home loans: Can home buyers truly get the full benefit of Rs 3.5 lakhs?.
Claiming exemption from capital gains tax with no taxable income? You still have to file your ITR.
Budget 2023-24: Metro projects in India allotted Rs 19,518 cr.
