Budget 2023: Rs 10-crore cap on capital gains deduction to affect uber luxury property sales

The Budget 2023 has capped the deduction on capital gains on investment in residential property at Rs 10 crore. This, according to real estate experts, may have an impact on the sale of uber luxury properties in prime South Delhi and Mumbai and farmhouses and also affect state revenues through property registrations.

“For better targeting of tax concessions and exemptions, I propose to cap deduction from capital gains on investment in residential houses under Sections 54 and 54F to Rs 10 crore,” Finance Minister Nirmala Sitharaman said in her Budget proposal for 2023-24.

Any capital gains arising from the sale of long-term assets, including residential houses, are now exempt from tax if the proceeds were invested in another residential property and there is no cap on the amount on which the deduction could be obtained. But under the new provisions, a cap of Rs 10 crore has been put on capital gains on which deduction will be available.

The memorandum to the Budget provisions said the primary objectives of the sections had been to mitigate the acute housing shortage and to give impetus to house-building activity. “However, it has been observed that claims of huge deductions by high net-worth assessees are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections,” it said.

“Deduction on capital gains on investment in residential houses is now capped at Rs 10 crore, meaning the benefit under Section 54F will no longer prevail for those with capital gains on more than Rs 10 crore. This could be seen as negative for HNIs looking to sell luxury homes, as previously there was no such cap. It means that if one sells a house and gains are more than Rs 10 crore, then the maximum benefit is till Rs 10 crore when invested into another property. While this would not impact primary sales, it could have one on the resale luxury market,” said Prashant Thakur, Senior Director and Head of Research at ANAROCK Group.

Amit Goyal, CEO of India Sotheby's International Realty, said that this may have an impact and appealed to the government to reconsider if this limit can be enhanced.

“This will certainly have an impact on luxury properties in Delhi and Mumbai, especially property purchases by promoters. It will certainly be a deterrent for  premium housing considering most of the stake sales by startups or fund raise etc by promoters are reinvested in luxury properties. Besides, this may also impact stamp duty collections. Farmhouse deals may also get impacted. In Delhi, farmhouses are generally of 2.5 acres which are not available for Rs 10 crore,” Goyal said.

Some property experts said that this may impact sale of luxury homes in redeveloped projects in Mumbai. A few developers in Mumbai have been buying land parcels in Mumbai in the hope of redeveloping them into luxury homes and making huge returns. That market may get impacted.

“This may not have a major impact as buyers who purchase luxury homes to save capital gains tax constitute just about 10 percent of the total luxury market sales. The rest purchase properties to live in it,” said Ritesh Mehta, Senior Director and Head for West and North, Residential Services & Developer Initiatives at JLL.

Some said that this proposal may benefit the holiday homes market in Goa and other cities where the average price of apartments is anything between Rs 1 crore and Rs 3 crore and villas cost Rs 3 crore to Rs 9 crore.

"This may be a better real estate investment as these are priced below Rs 10 crore and rental yields are also in the range of 3-4 percent," said Rohit Chopra of SanD Advisory Pvt Ltd, a property consultancy firm.

Akaash Chaudhary, co-founder and managing director of Aakash Educational Services, recently bought a bungalow for a whopping Rs 137 crore in New Delhi’s diplomatic enclave, Kautilya Marg. Zishaan Hayath, the founder of Toppr.com, purchased a sea-facing apartment in Mumbai for Rs 41 crore. Both ventures had been acquired by edtech firm Byju’s.

Abhinay Choudhari, co-founder of online grocery platform BigBasket, also bought a house for Rs 12.25 crore in the same project. This came on the heels of Tata Digital acquiring a majority stake in Supermarket Grocery Supplies, which owns BigBasket.

In the last two years, in top metro cities like Delhi, Mumbai and Bengaluru, tech entrepreneurs and corporate CXOs with hefty ESOPS have cashed out and joined the ranks of luxury home buyers. For long, this market was dominated by industrialists and film stars.

"While upgrading to a better lifestyle in line with their aspirations and needs are the top reasons to buy a luxury property, the other reason why a section of businessmen were going in for  such purchases is to save on capital gain tax by investing the money in residential properties," said a real estate expert.