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The budget decision to limit the deduction from capital gains on investment in residential property under Sections 54 and 54F to Rs 10 crore is likely to dampen demand for super-luxury real estate.
Sections 54 and 54F of the Income Tax Act of 1961 apply to long-term capital gains (LTCG) on selling capital assets such as homes, equity, bonds, and gold and their reinvestment in residential property.
“The set-off of capital gains arising on sale of residential units or sale of any other long-term asset, other than residential unit by investment in another residential unit is proposed to be capped at Rs 10 crore, which earlier did not have any such cap.
Recent luxury real estate transactions involving industrialists and start-up entrepreneurs can be classified as LTCG saving transactions.
According to tax experts, the move is likely to impact redevelopment projects in high-value real estate markets such as south Mumbai and a few localities in Delhi, though real estate developers disagreed.
While redevelopment projects have been abundant, particularly of older buildings in prime areas such as south Mumbai, any such assignment of the immovable asset to the builder would amount to a tax transfer.
In that case, even if the calculated value exceeded Rs 10 crore, there was generally no tax by claiming a deduction under Section 54, which now results in significant taxation to individual home sellers under redevelopment.
Despite the 10% allowance, property values in cities like Mumbai and Delhi are not aligned with current market prices and reflect much higher values than actual transaction values.
According to experts, the luxury property market could see deals in the next two months before the limit goes into effect on April 1.