Why Budget 2023 May Spark Rush Of Luxury Home Deals Till March
The capital gains tax regime in India is closely linked to India’s policy priorities. Over decades of policy planning the tax treatment administered to the various categories of assets has changed iteratively. In 1982-83, to address acute shortage of house building activity, the exemption from capital gains on purchase of residential property was extended. Similarly, in the 1983-84 budget, the taxpayer was provided wider scope of instruments that they could invest in, including shorter tenure G-secs, to avail exemption of capital gains. Now in 2023, to limit the exemptions of the receipts from very high value transactions, the finance minister has proposed that the exemptions available under Section 54 and 54 F will be limited to Rs 10 crore.
At present, under the Income Tax Act, 1961, tax on long-term capital gains from sale of residential property is applicable where the period of holding of the asset exceeds 36 months. In order to compute the gains, the assessee is allowed to deduct the expenses incidental to the sale, the cost of improvement and the indexed cost of acquisition. That is, the Act allows indexation that accounts for cost of inflation (explanation 5 to Section 48). The Income Tax Act in Section 54 exempts the capital gains from sale of house property where the net consideration is reinvested in a property for residence. Sections 54 EA to ED allows for exemption from capital gains from transfer of long-term capital assets where the proceeds are invested in specified securities. Even though the exemptions under Sections 54 EA to ED continue, section 54 that is a major relief and unlike the other exemptions thus far remained uncapped will now be restricted. Thus, the finance bill introduces a significant change where the exemption available to residents as well as non-residents, from purchase of another residential property in India is now capped at Rs 10 crore. Therefore, the exemption is not available to the extent the indexation does not cover the cost of sale and the gains are in excess of Rs 10 crore, there will be additional outgo on account of capital gains from sale of such high-value residential property.
It is anticipated that the proposed amendment will impact the luxury residential market, that has performed spectacularly in the last year and has even witnessed entry of international firms such as Sotheby’s. Anarock estimates that in the first half of 2022, 1.84 lakh units of residential homes were sold of which 14% were luxury homes costing above Rs 1.5 crore. As per Sotheby’s, 67% of the high and ultra-net worth individuals expressed interest in luxury residences in 2022 and most prefer properties between Rs 4 crore and Rs 10 crore. The numbers suggest that even among the luxury transactions, the premium segment within luxury homes may be affected immediately by the said change and will apply to fewer transactions.
Since the change comes into effect from April 1, 2023, those looking to sell may rush to sell before March 31. Over the next one year, there may be behavioural shifts in the way investments are made. The capping of such exemption can in fact push the splitting of assets, it can shift of preference among non-residents in favour of locations where taxes are relatively low as well as alter the reported value of transactions. All these can dampen the expected collections from the proposed change. The size of the market as well as the income from capital gains reported from all assets in the income tax statistics corroborate that the revenue impact will be minimal and this could be further exacerbate by a deceleration in the current trend of capital appreciation (9%) on account of sales within this financial years as well as lower transactions within this segment.
While the proposed amendment is consistent with the prior approach where exemptions for residence property are available to lower value transactions, which includes exemption for any purchase below Rs 2 crore is invested in two properties. Its fiscal impact will be minimal. Instead, the much-awaited rationalisation of the capital gains structure would have been more desireable.