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Budget 2023: Builders with mixed portfolio may not be impacted by cap on capital gains deduction

Some developers expect the limit on deductions to hurt sales of ultra-luxury homes

Builders with a mixed portfolio of projects ranging from affordable to luxury homes may not be affected much by a budget proposal to cap deductions from capital gains on investments in residential houses, real estate developers and experts said.

Currently, capital gains arising from the sale of assets held for the long term, including residential houses, are exempted from tax if the entire proceeds are invested in another residential house. From April 1, such deductions will be limited to Rs 10 crore and capital gains tax will be levied on amounts exceeding this cap.

“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,” finance minister Nirmala Sitharaman said in her budget speech on February 1.

According to real estate developer Sandeep Runwal, who is also president of NAREDCO Maharashtra, an apex body of developers, the cap will not have any impact on developers and sales.

“I do not think there will be any impact on high-end luxury housing due to the cap,” Runwal said at a discussion session on the budget.

Impact on individuals

In Mumbai, high net worth transactions account for 1 percent of the market, and of this, 5-10 percent of the transactions may attract capital gains tax, he said.

“Further, if you see, every developer will have one project that will be of high net worth and the remaining projects will be in the mid-income or affordable housing segment. Due to this, I do not feel this will have an impact on developers or even demand,” Runwal said.

Niranjan Hiranandani, a real estate developer from Mumbai who is also vice chairman of NAREDCO, said sales might not be impacted due to the cap and very few individuals are likely to be affected. “Homebuyers at the individual level might be impacted but not the industry at large,” Hiranandani said.

However, a section of experts and developers said the cap will impact sales. “If your capital gains are Rs 12 crore and if you’re buying a house worth Rs 12 crore, deduction eligibility will remain Rs 10 crore,” advocate Anil Harish said. “This will mean capital of Rs 2 crore will be taxable, which may be around 25-26 percent. One will pay Rs 50 lakh as tax and due to this there may be impact on demand on account of lower liquidity.”

Boman Rustom Irani, chairman of real estate developer Rustomjee Group, said the imposition of a cap on capital gains deduction is expected to impact demand for ultra-luxury homes negatively.

According to Motilal Oswal’s report on budget 2023-24, developers active in the mid-income segment will not be impacted by the cap. “While much was anticipated on the real estate sector, there was very little mention about the sector in the overall budget. Except for DLF, Oberoi Realty and Sunteck Realty, we do not foresee any negative impact on listed developers on account of the new capital gains proposal announced as most of them cater to the mid-income segment.”

Mehul R Thakkar
Mehul R Thakkar
first published: Feb 3, 2023 12:19 pm