IGI Logo

For better targeting of tax concessions and exemptions, Finance Minister Nirmala Sitharaman capped deduction from capital gains on investment in residential houses under sections 54 and 54F to Rs 10 crore.


Another proposal with similar intent is to limit income tax exemption from proceeds of insurance policies with very high value, she said.

Vishal Yeole, Vice President, Business Advisory Services, Waterfield Advisors said the Budget has proposed to limit the maximum deduction under Section 54 and Section 54F to Rs 10 crore.

Till now, there was no such limit and typically, high-net-worth individuals (HNIs) and Ultra high-net-worth individuals (UHNIs) would utilize this avenue to reduce their Capital Gains tax liability. The original intent of these exemption sections always had been to incentivize the Housing Sector and mitigate the shortage of housing. It was felt that the exemptions were not achieving the intended purpose and it is now proposed to substantially limit the arbitrage available on capital gains tax arising to HNIs/UHNIs, Yeola said.

As per the Finance Bill, the existing provisions of section 54 and section 54F of the Income-tax, 1961 (the Act) 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, or within a period of three years after that date constructed any residential property in India.

For section 54 of the Act, 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 of the Act, 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 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. 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.