The proposals of the Finance Bill 2023 related to income tax amendments can be widely considered to have a mixed response from the high-net-worth individual (HNI) community. While the move to reduce the highest surcharge rate from 37% to 25%, effectively reducing the overall tax rate from 42.74% to 39%, was widely celebrated; The restriction on capital gains exemption over INR 100mn and the 20% increase in TCS rate on foreign remittances with regard to reinvestment in residential property has left a bitter-sweet taste.
The Government had introduced sections 54 and 54F under the Income Tax Act, 1961 to provide relief to individuals and HUFs respectively from taxability of long-term capital gains from sale of residential house property or any other asset, where such long-term capital gains The profit was reinvested in residential house property within the specified time limit. The above relief/exemption was so far allowed without any restrictions/limits on the basis of re-investment norms.
The main intention behind providing the said relaxation was to mitigate the issue of acute housing shortage and to give a boost to the housing construction activity. However, the fallout of the COVID-19 pandemic which leads to hybrid work mode has resulted in increased interest in luxurious homes by HNI’s. Further, it was observed that huge deductions were being claimed by HNIs by purchasing very expensive residential houses under these provisions. Also, in many venture capital and private equity transactions, the promoter sellers being individuals and HUFs save tax on long-term capital gains by investing in residential house properties.
Hence, it was defeating the very purpose of granting exemption. Further, exemptions are also allowed without any limit. Most of the HNI wealth gets concentrated in the residential real estate sector, resulting in high growth in house prices, thereby increasing the demand for HNIs, thereby increasing the middle/salaried class. The buyers turn away. For affordable homes.
Accordingly, in order to bridge the gap and allow taxpayers appropriate exemption from long-term capital gains tax, it is proposed to cap the limit for claiming deduction by way of reinvestment in residential house property at Rs 100 million.
The said move of the government can also be seen from the point of view of widening the tax base which was one of the seven focus points of the budget. In this regard, it is worth noting that according to a survey conducted by India Sotheby’s International Realty, which sought responses from over 200 HNIs, 89% (of 76% who responded positively) said they would Would like to buy property instead of business property. Also, among options to buy residential real estate, a city apartment in the range of INR 100-250mn topped the chart, accounting for 34%. The survey further indicated that 67% HNIs were planning to buy a luxury property in the next two years.
Separately, recent trends show high interest of the HNI community in the overseas real estate market with significant investments. It is noteworthy that according to the Asia-Pacific Wealth Report, the data shows that Indians are the largest investors in foreign real estate with a 50% share. In addition, recent data on real estate investment in the UAE in 2022 shows that Indians are expected to sell residential properties worth INR 355,000 million, accounting for 40% of the market share.
Keeping these latest trends in mind, the government has also proposed to increase the Tax Collection at Source (TCS) rate from 5% to 20% now for remittances above Rs 7 lakh without any remittance limit. The move has made the HNI community sweat it out considering the huge impact it will have on foreign real estate investments.
In short, the proposal to limit the capital gains exemption to Rs 100 million can be seen rightly in keeping with the objective of curbing unbridled growth in property prices and reducing the acute housing shortage in line with the Pradhan Mantri Awas Yojana Is; While at the same time expanding the tax base for the ever-expanding government in a real estate market dominated by HNIs. Besides this, it will also be interesting to see the impact of the proposed increase in TCS rate to 20% on foreign real estate investment.
Author: Niranjan Govindekar, Partner – Tax & Regulatory Services and Hemlata Bhungare, Director – Tax & Regulatory Services, BDO India
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