In the Finance Bill 2023, the government changed the rules of tax exemption on capital gains from residential housing property. As per the current tax rules, if a person invests the capital gain arising from the sale of a residential house in the purchase of another property over a specified period of time, then he is exempted from long term capital gains tax. Now the government has capping it. According to the new rules, the investment limit for getting exemption from capital gain will be up to Rs 10 crore. Experts believe that this decision of the government is not positive for the investors and the sector. But, a large section of home buyers or investors will not suffer any loss from this provision.
Tax and investment expert Balwant Jain says that capping capital gains on residential housing is directly going to harm investors. But, its major impact will be on High Net Worth Individuals (HNIs). In the new provisions, the government has capping Rs 10 crore. This means, if you buy a property worth more than 10 crores, then you will be able to take exemption from capital gains tax only up to 10 crores.
Balwant Jain says, the government’s objective with this capping is that HNIs should not be able to take advantage of tax concessions. That is, those who have the ability to pay tax, tax should be taken from them. They could not take advantage of more tax exemptions. On the other hand, it will not have much impact on common home buyers or investors. This is because most deal sizes in residential housing are less than 10 crores. Only HNIs deal in ticket sizes higher than this.
What is the provision, what has changed
Under Section 54 of the Income Tax Act, you get exemption on long term capital gain on sale of a residential house, if you invest that amount for the purchase or construction of a residential house within a specified time frame. Similarly, Section 54F allows you tax exemption from long-term capital gains on sale of any property other than a residential house, if you invest the total amount received within a specified time frame to buy or construct a residential house.
At present, there is no cap on the amount for claiming exemption from LTCG by investing in a residential house. According to the proposals of Budget 2023, if you claim tax exemption on capital gains under section 54 or 54F, then the value of investment in residential house should not be more than 10 crores. However, there is no restriction on the value of the house you want to buy or invest in. That is, more than 10 crores can be taken as a residential house, but the exemption can be claimed only up to 10 crores.