Government Imposes Rs 10 Crore Deduction Limit On Capital Gains On Re-Investment In Residential Properties

The government on Wednesday imposed a limit of Rs 10 crore for deduction on long-term capital gain tax for reinvestment in residential properties under Section 54 and 54F of the Income Tax Act.

These two sections deal with reinvestment of proceeds from sale of long-term assets (housing or other capital assets) to buy residential properties.

"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 speech.

The new provision, according to the memorandum to the Finance Bill, seeks to prevent huge deductions claimed by high-net-worth assessees after purchasing very expensive residential houses.

The existing provisions of Sections 54 and 54F allow deduction on the capital gains arising from the transfer of long-term capital asset if an assessee purchases or constructs residential property.

For Section 54, the deduction is available on the long-term capital gain arising from transfer of a residential house if the capital gain is reinvested in a residential house, while in Section 54F, the deduction is available on the long-term capital gain arising from transfer of any long-term capital asset except a residential house, if the net consideration is reinvested in a residential house.

"The primary objective of the Sections 54 and Section 54F of the Act was to mitigate the acute shortage of housing, 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," the document said.

In order to prevent this, it is proposed to impose a limit on the maximum deduction that can be claimed by the assessee under section 54 and 54F to Rs 10 crore.

"It has been provided that if the cost of the new asset purchased is more than Rs 10 crore, the cost of such asset shall be deemed to be Rs 10 crore."

This will limit the deduction under the two sections to Rs 10 crore rupees.

These amendments will take effect from April 1, 2024 and would apply in relation to the assessment year 2024-25 and subsequent assessment years, the Budget document said.