The budget decision to cap the deduction from capital gains on investment in residential property under Sections 54 and 54F at Rs 10 crore is likely to have an impact on demand for super luxury real estate.
Sections 54 and 54F of the Income Tax Act of 1961 apply to long-term capital gains (LTCG) from the sale of capital assets such as homes, equity, bonds, and gold, as well as their reinvestment in residential property.
Deloitte India partner, Hemal Mehta said that the set-off of capital gains arising on the sale of residential units or the sale of any other long-term asset–other than a residential unit–by way of investment in another residential unit is proposed to be capped at Rs 10 crore, which earlier did not have any such cap. This proposal will certainly impact HNIs’ high-value transactions.
Several recent luxury property transactions involving industrialists and startup entrepreneurs can be classified as LTCG-saving transactions.
Tax experts said that the decision will probably impact redevelopment projects in high-value real estate markets such as south Mumbai and a few localities in Delhi. However, realty developers didn’t agree.
According to Mitil Chokshi, partner at Chokshi & Chokshi, LLP, while there has been an abundance of redevelopment projects, particularly of older buildings in prime areas such as south Mumbai, any such assignment of the immovable asset to the builder would be considered a transfer under tax regulations.
Chokshi said, “In such a case, even though the reckoner value exceeded Rs 10 crore, there was generally nil tax by claiming deduction under Section 54, which now will result in significant taxation for individual home sellers under redevelopment.”
Despite the 10% allowance, most ready reckoner values in cities like Mumbai and Delhi are not aligned with current market prices and reflect much higher values than actual transaction values.
Some experts said that the luxury property market could witness deals in the next two months before the limit is implemented on April 1.
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