Real estate investments are a favourite with high-net worth individuals and those in the top bracket among the salaried class. They often make considerable gains on real estate transactions, taking advantage of the benefits available under Sections 54 and 54F that provide a deduction on capital gains.

The finance minister has now capped the benefits on deduction in long-term capital gains by limiting the rollover benefit under these two sections. 

Under existing provisions, any capital gains arising from the sale of long-term assets including residential houses, would be exempt from tax if the proceeds were invested in another residential house. There was no cap on the amount on which the deduction could be obtained.

Now, under the new provisions, the government has put a cap of ₹10 crore on the capital gains on which deduction will be available.

Justifying this, the memorandum to the budget provisions said the primary objectives of the sections had been to mitigate the acute housing shortage and to give impetus to house-building activity. “However it has been observed that claims of huge deductions by high net-worth assesses are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections.”

If the cost of a new asset purchased exceeds i ₹10 crore, then the cost of such an asset would be deemed to be ₹10 crore, limiting the deduction under the two sections to ₹10 crore.

Head of research at JLL India Samantak Das said this was a prudent decision and somewhat balanced the reliefs provided in personal income tax provisions. He added that about 90 per cent of transactions (by volume) would be well within the cap and it would affect only very high-value transactions.