The Budget has plugged a loophole related to the capital gain exemption for residential house that previously allowed claims of huge deductions by high-net-worth assessees. Finance Minister Nirmala Sitharaman has proposed to cap the deduction from capital gains on investment in residential house under sections 54 and 54F to ₹10 crore. The step shall pave the way for better targeting of tax concessions and exemptions.

The existing provisions of section 54 and section 54F of the Income-tax, 1961 allows 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. This can also be done within a period of three years after that date constructed any residential property in India. 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. 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.

While the primary objective of the sections 54 and section 54F was to mitigate the acute shortage of housing, and to give impetus to house building activity, the Government observed that claims of huge deductions by high-net-worth assessees were being made under these provisions. They did this by purchasing very expensive residential houses, thus defeating the very purpose of these sections.

“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 rupees ten crore. It has been provided that if the cost of the new asset purchased is more than rupees ten crore, the cost of such asset shall be deemed to be ten crores. This will limit the deduction under the two sections to ten crore rupees,” a budget document said.

Consequentially, the provisions of sub-section (2) of section 54 and sub-section (4) of section 54F that deal with the deposit in the Capital Gains Account Scheme have also been amended. These amendments will take effect from the April 1, 2024 and accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.

There are concerns raised from some sections of homebuyers that luxury houses at top locations in Mumbai and Delhi may cost a lot more than ₹10 crore and taxing all gains beyond ₹10 crore may be a huge burden.