Ancestral-home sales, joint development hit by new capital gains rules
Looking to sell your ramshackle ancestral home to buy a couple of apartments? Be prepared to shell out a hefty sum in capital gains tax, as the Budget has capped tax breaks available to such property buyers.
This has been done through a seemingly innocuous tweak in the language of Sections 54 and 54F of the Income-Tax Act.
Until this Budget, anyone selling buildings, land or other long-term assets and using the money to purchase a residential house within three years of the sale was not required to pay capital gains tax (20 per cent) on the sale proceeds.
But the Finance Minister has now tweaked this section to specify that only “one residential house in India” would be eligible for the tax break, instead of “a residential house”.
Middle class hit
If you are wondering what the difference is between “a residential house” and “one residential house”, tax experts say it is quite substantial. This will bring a large number of hitherto exempt property transactions within the tax net.
For instance, earlier, if you realised ₹4 crore as capital gains from the sale of land and bought four apartments of ₹1 crore each, you would not have to pay any capital gains tax on your sale. But now, you will escape capital gains tax only on ₹1 crore deployed in a single home while paying a 20 per cent tax on the remaining ₹3 crore of gains.
“This proposal will hit the middle class home-buyer the most. Given that the Budget has elsewhere proposed to provide a boost to middle-class housing, this seems contradictory,” says Anish Thacker, Tax Partner, Ernst & Young.
“There may be quite a few instances where siblings inherit a home from their ancestors and sell it to buy multiple homes across the city. To expect such properties to be contiguous would be unrealistic,” he explained.
The new rules will also hit landowners who enter joint development agreements, points out K Vaitheeswaran, an advocate. They were earlier able to offset capital gains tax on any number of apartments they received from the builder, but this amendment restricts it to just one apartment, he says.
In larger deals in suburban areas, the landowners will have no option but to reinvest in a single piece of land to avoid capital gains tax, said a developer.
Tax experts explained that this section had been subject to varying interpretations before this, leading to litigation. “There was a loophole in the tax system, which has been plugged”, says Venkat Krishnamurthy, partner with V Ramaratnam & Company, Chartered Accountants.
Real estate developers are concerned that these rules will severely restrict an important reinvestment opportunity, hitting the middle income group and families with ancestral property.
Landowners typically use the joint-development route to swap one piece of land for many apartments for their children.
Apart from those buying property for their own use, the new rules may also hit investors who ‘flip’ properties for speculative gains. Some affluent investors make advance bookings of apartment in upcoming projects, ‘warehouse’ it and sell it to users at a premium when the project is completed.
But such investors may now have to shell out capital gains tax every time they buy more than one property. However, Anil Sachidanand, MD and CEO, Aspire Home Finance, says that the move could have some positive spin-offs for the market too.
“A small section of people in the business of property arbitrage will be impacted by this clarification. But I think it is a welcome move as it will lead to greater transparency in real estate transactions”.
(With inputs from Aarati Krishnan)