The proposal to cap deduction from capital gains on investment in residential houses under sections 54 and 54F to Rs 10 crore will certainly impact high-value transactions of high-net worth individuals (HNIs), but may not have a significant impact on the overall residential real estate market. Anuj Puri, chairman, Anarock, said that the move will impact the secondary sales market. “The Rs 10-crore capital gains cap is certainly sombre news for the secondary luxury sales market – but the impact will not percolate beyond very large ticket sizes,” he said.
Currently, a resident or non-resident individual or a HUF (Hindu Undivided Family) can claim an exemption from tax on long-term capital gains arising on the transfer of any asset, including a residential house, if such capital gains or net sales consideration as provided under the relevant provision is reinvested, within the specified period, in the construction or purchase of a new residential house. The exemption is available subject to satisfaction of certain conditions. However, there is no monetary cap on the quantum of exemption.
“The Finance Bill proposes to limit such exemption to a sum of Rs 10 crore. Consequently, any long-term capital gains in excess of it shall be taxable in the hands of the individuals/HUF,” said an explanatory note from Khaitan & CO.According to Vivek Rathi, director (research) at Knight Frank India, the move will impact properties of Rs 30 crore and above, which is under 2% of the primary and secondary sales market put together.
“The premise of the buyers in this segment is preservation of wealth, and they re-deploy gains into asset classes to beat inflation, for better gains on value and buying bigger and better properties. Even with this cap, the end users will continue to buy, and investors who were looking at the purchases purely from tax and returns point of view may look at other asset classes,” he said.
However, Amit Goyal, CEO, India Sotheby’s International Realty, said that the move is a dampener for the residential sector. “It can be a big deterrent for the housing industry. We sincerely appeal to the government to reconsider this limit,” he said.For perspective, premium segment of residential real estate has performed better compared to the affordable segment in the last one year. Also, with homebuyers inclination towards bigger and better properties post-pandemic, the luxury real estate market witnessed good sales volumes during and after the pandemic.
However, there has been stress on lower end segment of homebuyers, like the other consumer segments where the mass categories are feeling the inflation pressure. The share of the affordable segment in annual sales in 2022 has declined compared to the previous year, according to JLL’s residential market update – Q4 2022. The share of apartments priced below Rs 50 lakh in total annual sales has declined from 28% in 2021 to 22% in the current year. In contrast, the share of the premium segment — above Rs 1.5 crore – has seen an increase from 10% to 19%.
Almost half of the sales witnessed in 2022 came from apartments in the price bracket of up to Rs 75 lakh. The sales momentum also remained strong in the premium segment as apartments in the Rs 1.5-crore-plus price tag had a share of 19% in the overall sales recorded in 2022.