A memorandum issued by the finance department stated that the primary objective of sections 54 and 54F of Income-Tax Act, 1961, was to mitigate the acute shortage of housing and to give an impetus to house-building activity. However, the department said, it had been observed that high net-worth assessees were making claims of huge deductions under these provisions by purchasing ultra-deluxe residential houses, thereby defeating their very purpose. The Budget has, in this backdrop, fixed a limit on the maximum deduction that can be claimed by an assessee under these sections at Rs 10 crore.
The move to withdraw capital gain tax benefit on the sale of fixed assets, such as property, above the value of Rs 10 crore, may disincentivise families from buying multiple houses as a security provision for their children, experts say.
Niranjan Hiranandani, vice-chairman of National Real Estate Development Council (NAREDCO) and CMD of Hiranandani Group, however, said that a higher personal tax rebate of 37% (up from 25%) on income of more than Rs 5 crore would allow additional disposable income in the hands of the discerning homebuyers to be invested back in a safe asset — “home”.
In a statement, the Confederation of Real Estate Developers’ Associations of India (CREDAI) said that capping the deductions from capital gains at Rs 10 crore could see some moderation in the luxury housing demand. However, lower surcharge rates will provide the required fillip to the sector.
The Budget has also disallowed the clubbing of interest payments on the loan taken to acquire a property with its cost of acquisition. Therefore, when the acquired property is sold, the interest cost can no longer be a part of the cost of acquisition in calculating the capital gains.
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, within a period of one year before or two years after the date on which the transfer took place purchased any residential property in India, or within a period of three years after that date constructed any residential property in the country.
The ambit of Section 54 is limited to capital gains arising out of sales of a house property, but under Section 54F, the deduction is available on long-term capital gains arising from the transfer of any long-term capital asset, except a residential house, if the net consideration is reinvested in a residential house.
The Budget has also amended the sub-section (2) of Section 54 and sub-section (4) of Section of 54F, which deal with the deposit in the Capital Gains Account Scheme. Under this, the capital gains amount deposited under the scheme, before it is utilised to buy another house, does not attract capital gains tax. It is proposed to cap the deposits against the capital gains up to Rs 10 crore only in the tax-savings deposit scheme.
For preventing a double deduction claim on the interest on the borrowed capital for acquiring, renewing or reconstructing a property, the amount of any interest payable on the capital is allowed as a deduction under the head “income from house property” under section 24 of the Act.
The department said that some assessees had been claiming double deduction of interest paid on the borrowed capital. To end this, the Budget has provided that the cost of acquisition or the cost of improvement shall not include the amount of interest claimed under Section 24.