How Will The Highest Deduction Cap of INR 10 Crore in The Union Budget 2023 Impact The Luxury Real Estate Industry in India?

Union Budget 2023 - INR 10 Crore Cap on Tax Deductions

India's luxury real estate sector had a surge of high-priced transactions in 2022. Many of these luxury real estate transactions included the reinvestment of capital gains in order to avoid paying the Capital Gains Tax.

With finance minister Nirmala Sitharaman suggesting a ceiling of INR 10 Crore on tax deductions for reinvestment of sale proceeds, it would be fascinating to see the reaction of the Indian luxury real estate market.

Sections 54 and 54F
According to a study from the finance department, the major purpose of sections 54 and 54F of the Income-Tax Act of 1961 was to alleviate the severe housing scarcity and stimulate home construction. According to the IRS, high-net-worth taxpayers have claimed substantial deductions under these laws by acquiring ultra-luxurious houses, which contradicts their intended purpose.

In this regard, the Budget has restricted, at Rs 10 crore, the maximum deduction an assessee may claim under certain provisions.

According to real estate specialists, the abolition of the capital gain tax advantage on the sale of fixed assets, such as real estate, valued at more than Rs 10 crore may discourage families from holding several homes for their children's security.

* Additionally, the Budget restricts the addition of loan interest payments to a property's purchasing price.

* Consequently, interest expenses cannot be included into the calculation of capital gains upon the sale of an acquired property.

Existing provisions of sections 54 and 54F permitted a deduction on capital gains arising from the transfer of a long-term capital asset if the assessee purchased or constructed a residential property in India within one year before, two years after, or three years after the transfer date.

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An important point - Section 54 is confined to long-term capital gains resulting from the sale of a home, but Section 54F provides a deduction for long-term capital gains emerging from the transfer of any other long-term capital asset, provided the net consideration is reinvested in a residential property.

In addition, Budget 2023 changes subsections (2) and (4) of section 54 and section 54F, which govern the Capital Gains Account Scheme deposit. This exempts from capital gains tax the amount of capital gains deposited under the scheme prior to their use to purchase another home. The tax-savings deposit programme is intended to limit deposits against capital gains to a maximum of 10 crore Indian rupees.

In order to prevent claiming a duplicate deduction for interest on borrowed capital used to acquire, renovate, or rebuild a property, section 24 of the Act allows any interest due on the capital to be deducted under the category "income from home property."

According to the government, some taxpayers claimed interest paid on loans twice. In order to correct this, the Budget stipulates that the amount of interest claimed under Section 24 cannot be included in the cost of acquisition or renovation.

Conclusion:
With the ceiling of INR 10 Crore on tax deductions for reinvestment of sale proceeds, all the stake holders in the luxury real estate market in India will surely have to evolve to keep the omentum going. This includes luxury real estate developers, luxury real estate brokers as well as the luxury property buyers.