Minister of Finance Nirmala Sitharaman On Wednesday recommended capping the deduction capital gain on investment in residential property under Sections 54 and 54F of RS 10 crore. The new provision seeks to prevent huge deductions being claimed by wealthy appraisers after purchasing very expensive homes.
Previously, there was no such limit, and typically high net worth individuals would use this route to reduce their capital gains tax liability. Several Unicorn promoters and management members who held stock options had previously claimed capital gains tax exemption and invested in luxury residential real estate. Accordingly, in order to curb these practices, the Government has now proposed reducing the benefits available under the provisions to Rs 10 crore.
“In order to better align tax benefits and exemptions, I propose to limit the deduction of capital gains on residential investments under Sections 54 and 54F to Rs 10 crore,” Finance Minister Nirmala Sitharaman said in her budget proposal for 2023-24.
“The primary objective of Sections 54 and Section 54F of the Act was to alleviate the acute housing shortage and stimulate housing activity.
“However, it has been observed that high net worth appraisers are claiming huge deductions under these regulations by buying very expensive homes. This contradicts the very purpose of these sections,” the memorandum to the finance law reads.
“It has been envisaged that if the cost of the newly purchased asset is more than €10 million, then the cost of that asset is to be valued at €10 million.”
This limits the deduction under the two sections to Rs 10 crore.
These changes will come into effect on April 1, 2024 and would apply in respect of the 2024-25 assessment year and subsequent assessment years, the budget document said.
The move is likely to impact sales of luxury properties in prime South Delhi and Mumbai, as well as farmhouses, and will also impact government revenue through property registration.
Capital gains on the sale of long-term assets, including homes, are currently tax-free if the proceeds have been reinvested in another home and there is no maximum deduction limit. But under the new rules a cap of Rs 10 crore on capital gains has been set on which a deduction will be possible. This means that if someone sells a house and profits are more than Rs 10 crore, the maximum profit is up to Rs 10 crore if invested in another property.
“The Indian government has proposed changes to tax laws in relation to household home purchases. Previously, a person could freely offset the capital gains from the sale of their home against the cost of buying another home. However, the budget proposal now caps this offsetting at a maximum of Rs. 10 crores for the purchase of the new property. This means that if the cost of the new property exceeds Rs. 10 crores, the person will have to pay tax on the excess capital gains.” stated Ankit Jain, Partner, Ved Jain & Associates.
Jain said the change is particularly relevant in urban cities like Delhi and Mumbai where property prices are high and can easily exceed Rs 10 crore even for small plots.
“As a result, sellers of high-value properties must consider this change and plan their transactions carefully to avoid paying a large tax bill on the capital gains,” he said.
According to Amit Goyal, CEO of India Sotheby’s International Realty, this said it will impact luxury home sales, stamp duty revenue and farmhouse deals.
Anuj Puri, Chairman of Anarock Property Consultants, said: “This (the cap proposal) appears to be negative for HNIs as there was no such cap previously. This means that if you sell a house and gains are more than Rs 10 crore, the maximum gain is up to Rs 10 crore if you invest in another property.” Anarock believes the move will not have a direct impact on the sale of primary luxury real estate, but the luxury real estate resale market would be adversely affected.
Previously, there was no such limit, and typically high net worth individuals would use this route to reduce their capital gains tax liability. Several Unicorn promoters and management members who held stock options had previously claimed capital gains tax exemption and invested in luxury residential real estate. Accordingly, in order to curb these practices, the Government has now proposed reducing the benefits available under the provisions to Rs 10 crore.
“In order to better align tax benefits and exemptions, I propose to limit the deduction of capital gains on residential investments under Sections 54 and 54F to Rs 10 crore,” Finance Minister Nirmala Sitharaman said in her budget proposal for 2023-24.
“The primary objective of Sections 54 and Section 54F of the Act was to alleviate the acute housing shortage and stimulate housing activity.
“However, it has been observed that high net worth appraisers are claiming huge deductions under these regulations by buying very expensive homes. This contradicts the very purpose of these sections,” the memorandum to the finance law reads.
“It has been envisaged that if the cost of the newly purchased asset is more than €10 million, then the cost of that asset is to be valued at €10 million.”
This limits the deduction under the two sections to Rs 10 crore.
These changes will come into effect on April 1, 2024 and would apply in respect of the 2024-25 assessment year and subsequent assessment years, the budget document said.
The move is likely to impact sales of luxury properties in prime South Delhi and Mumbai, as well as farmhouses, and will also impact government revenue through property registration.
Capital gains on the sale of long-term assets, including homes, are currently tax-free if the proceeds have been reinvested in another home and there is no maximum deduction limit. But under the new rules a cap of Rs 10 crore on capital gains has been set on which a deduction will be possible. This means that if someone sells a house and profits are more than Rs 10 crore, the maximum profit is up to Rs 10 crore if invested in another property.
“The Indian government has proposed changes to tax laws in relation to household home purchases. Previously, a person could freely offset the capital gains from the sale of their home against the cost of buying another home. However, the budget proposal now caps this offsetting at a maximum of Rs. 10 crores for the purchase of the new property. This means that if the cost of the new property exceeds Rs. 10 crores, the person will have to pay tax on the excess capital gains.” stated Ankit Jain, Partner, Ved Jain & Associates.
Jain said the change is particularly relevant in urban cities like Delhi and Mumbai where property prices are high and can easily exceed Rs 10 crore even for small plots.
“As a result, sellers of high-value properties must consider this change and plan their transactions carefully to avoid paying a large tax bill on the capital gains,” he said.
According to Amit Goyal, CEO of India Sotheby’s International Realty, this said it will impact luxury home sales, stamp duty revenue and farmhouse deals.
Anuj Puri, Chairman of Anarock Property Consultants, said: “This (the cap proposal) appears to be negative for HNIs as there was no such cap previously. This means that if you sell a house and gains are more than Rs 10 crore, the maximum gain is up to Rs 10 crore if you invest in another property.” Anarock believes the move will not have a direct impact on the sale of primary luxury real estate, but the luxury real estate resale market would be adversely affected.
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