Realty check for luxury housing after crucial change in tax structure

Deduction can be availed of under Section 54 and Section 54F in the same assessment year, thereby enhancing total limit, say tax experts

After languishing for five-six years, the luxury housing segment revived during and after the pandemic. According to data from Anarock Research, average prices across luxury micro-markets have jumped 7 to 21 per cent between 2019 and 2022. The question is whether the change proposed in the Budget to Section 54 and 54F, capping the deduction at Rs 10 crore, will stall the revival.

Desire to upgrade drove revival

One factor responsible for the revival in the luxury segment was the increase in demand for larger houses during and after the pandemic. Due to work from home, many people felt the need to upgrade to a house with an extra room.

Says Anuj Puri, chairman, Anarock Group: “The discounts, attractive payment schemes, and other offers made by developers also helped engineer a turnaround.”

HNIs, who drive the luxury home market, were least affected by the pandemic. The increase since May 2022 in home loan rates has also not impacted them as they don’t generally rely on mortgages.

“The demand for high-value properties comes from top corporate executives, businessmen, and start-up founders who have done exceedingly well on their equity ownership portfolios over the past two years,” says Amit Goyal, chief executive officer (CEO), India Sotheby's International Realty.

During the bull run in equities from March 2020 to October 2021, many HNIs made a lot of money in that market. “With the equity market turning volatile over the past year or so, a large chunk of the wealth amassed by investors in the preceding years got reinvested into luxury real estate, where there has been significant price appreciation,” says Shalin Raina, managing director, residential services, Cushman & Wakefield.

Supply dried up during the pandemic as construction ground to a halt. “Price points were attractive with good discounts being offered in late 2020, which led to a lot of transactions happening in late 2020 and early 2021. When new supply came in late 2021 and early 2022, it received a good response,” says Subhankar Mitra, managing director, advisory services, Colliers India.    

Demand for luxury housing has also emanated from NRIs, who during the pandemic realised the need to have a base in India. “While the world is grappling with a recession, the Indian economy remains resilient. This has made it a favoured investment destination among NRIs,” says Raina.

Sections 54 & 54F amendment

Section 54 and Section 54F of the Income-Tax Act, 1961 allow deduction on capital gains arising from the sale of a long-term capital asset. This is permitted provided the assessee purchases a residential property in India one year before or two years after the date on which the transfer took place. Alternatively, he should construct a residential property in India within three years of transfer.

Section 54 applies to the deduction available on long-term capital gain (LTCG) arising from the transfer of a residential house, which is reinvested in another residential house. Section 54F applies when LTCG from the transfer of other long-term capital assets (not a residential house) is reinvested in a residential house.

The government felt these provisions were being misused by HNIs (start-up founders, for instance, made huge gains on their shareholding in their firms and reinvested the gains in a luxury property). Currently there is no cap on the amount of deduction that can be availed. Budget 2023 has proposed a Rs 10 crore limit.

Suppose that a person’s LTCG from the sale of a house is Rs 15 crore. “After the proposed changes come into force, the seller will be able to avail of a deduction of only Rs 10 crore on the new purchase. On the rest Rs 5 crore, he will be taxed at 20 per cent with indexation,” says Abhinay Sharma, managing partner, ASL Partners.

Investment demand may be hit

Capital gains are generated on resale, so the secondary market could be affected. “HNI investors will be less keen to sell luxury homes if they can’t reinvest the proceeds of more than Rs 10 crore in a tax-efficient manner,” says Puri.

The proposed cap could have a negative impact on investment demand. Says Ankit Jain, partner, Ved Jain & Associates: “While end users may not be deterred, individuals who buy properties as investments may be affected as they will see reduced returns due to this tax change.”  

Some experts believe the proposed amendment won’t have a significant impact. “Those who typically invest in luxury properties don’t do so specifically for tax savings. Moreover, buyers in this segment usually have more than one property in their names, which would preclude them from the benefit anyway,” says Pallav Pradyumn Narang, partner, CNK.

Some tax planning is possible

Experts say some tax planning can be done. Says Sharma: “The assessee will now need to differentiate their property under the ownership of different individuals, such as husband, wife, child, Hindu Undivided Family, etc, so that they can cumulatively save LTCG in multiples of Rs 10 crore.”

Some experts opine that the deduction under Section 54 and under Section 54F are mutually exclusive. “The law still allows taxpayers to claim the deduction on both sections in the same assessment year. So, one can enjoy a total deduction of up to Rs 20 crore on capital gains,” says Jain.

Naveen Wadhwa, deputy general manager, Taxmann, is of the view that taxpayers can avail the benefit of Section 54EC in conjunction with Section 54. “However, the condition for Section 54EC—that asset transferred is immovable — must be fulfilled,” he says. 

This amendment will be applicable only from the financial year 2023-24. “Taxpayers who have pending investments in residential properties or amounts lying in capital gains accounts scheme can look at purchasing a new residential property or utilising the amount in capital gains account scheme on or before March 31, 2023 to claim full exemption,” says Suresh Surana, founder, RSM India.