Mr. A Sekar (Chartered Accountant) addresses the practical issues likely to arise due to the proposed amendment to impose an upper limit of 10Cr. on the maximum deduction that can be claimed under Section 54 and 54F; He apprises that the primary objective of deduction under Sections 54 and section 54F was to mitigate the acute shortage of housing and to give impetus to house building activity. He points out that the lawmakers failed to take into consideration the number of the so called ‘high-net-worth assesses’ in India, their percentage as a whole in terms of the total number of assesses etc., before imposing such an artificial and unrealistic ceiling on such investment. He illustrates that in case an Assessee derives a taxable capital gain or the net sale consideration of 11 Cr, he/she has to look out for a residential property costing ten crores or less, and pay tax on the balance of one crore of rupees. He opines that “Most of the senior citizens holding old and large houses, wanting to sell such houses and look for reinvestment in similar residential houses would certainly be put to extreme hardship if this artificial ceiling imposed by the Finance Bill becomes a law”. He urges the taxpayers associations and similar bodies to take up this cause to ensure such proposed ceiling is dropped in the ultimate Finance Act.

Budget 2023: Limiting the overall benefit claimed under section 54 and section 54F

The legislative intent behind Section 54 as well as Section 54F of the Income tax Act 1961 is to promote housing. Both the sections allow exemption to an Individual/HUF , who reinvest the capital gains arising from sale of a Residential House( under Section 54) or net consideration arising from the transfer any other capital asset other than Residential house  (under Section 54F) into the purchase or construction of a Residential House. Such purchase  of the new Residential house can be either one year before or two years after the sale of the residential house  under Section 54(1) and from the date of transfer of any other capital asset (other than Residential house)under Section 54F(1). If the individual or the HUF intends construction of a new residential house, a time limit of three years has been prescribed under the respective sections and the three year period is reckoned from the date of transfer of the asset.

The common feature found in both these Sections 54 and 54F is the investment in another Residential house either by way of purchase of by way of construction.  The exemptions were allowed to the extent of such investment without any monetary limits.  An individual or a HUF can sell a residential house for fifty crores of rupees, resulting in a taxable capital gain of say thirty crores of rupees, such capital gains can be reinvested by  purchase or construction  another residential house and enjoy total exemption from capital gains tax.  Similar is the case of an assessee derives long term capital gains on sale of not only non-residential house properties (Commercial properties), but also on sale of company shares, say for example a sum of one hundred crores, the net sale consideration on such sale can be reinvested in a residential property u/s 54F subject to certain conditions on the number of residential houses owned by the assessee.  Here also, the point to be noted is that there was no monetary ceiling on such reinvestment at anytime in the past.  It was precisely for these reasons, these Sections were intended to give impetus for promotion of housing.

The Finance Bill 2023 has brought about a ceiling on such reinvestment in Residential houses for the purposes of claiming exemption under Section 54/54F to Rupees ten Crores.

The memorandum explaining the provisions of Finance Bill 2023 in respect of Section 54/54F (vide Clauses 25 and 30 of Finance Bill 2023) explains the rationale behind the introduction of such ceiling as under:

Limiting the roll over benefit claimed under section 54 and section 54F

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.

1. The primary objective of the 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.

2. 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 rupees ten crore. It has been provided that if the cost of the new asset purchased is more than rupees ten crore, the cost of such asset shall be deemed to be ten crores. This will limit the deduction under the two sections to ten crore rupees.

3. Consequentially, the provisions of sub-section (2) of section 54 and sub-section (4) of section 54F that deals with the deposit in the Capital Gains Account Scheme have also been amended. It is proposed to insert a proviso to provide that the provisions of sub- section (2) of section 54 and sub-section (4) of section 54F, for the purpose of deposit in the Capital Gains Account Scheme, shall apply only to capital gains or net consideration, as the case may be, upto rupees 10 Crores.

4. These amendments will take effect from the 1st day of April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.

The law makers still appear to accept as primary objective of Sections 54/54F was to mitigate the acute shortage of housing and to give impetus to house building activity, but the reason behind imposing a limit of Rupees 10 Crores appears to defy all logic. It has been stated “claims of huge deductions by high-net-worth assesses are being made under these provisions, by purchasing very expensive residential houses and it is defeating the very purpose of these sections”. The Government has not taken into consideration the number of the so called “high-net-worth assesses” in India, their percentage as a whole in terms of the total number of assesses etc., before imposing such an artificial and unrealistic ceiling on such investment.  It is common knowledge that even a piece of empty land of 2400 sq. ft. in a good well connected residential locality in any metro-cities or town in India easily costs not less than five crores of rupees to ten crores of rupees.  It looks like the law makers do not want even construction of residential house on just one ground of land, as the total cost would easily exceed ten crores of rupees. Assuming an assessee derives a taxable capital gain or the net sale consideration of eleven crores of rupees, he/she has to look out for a residential property costing ten crores or less, and pay tax on the balance of one crore of rupees.  If he/she is unable to locate such property and is compelled to invest in a property which costs more than 10 crores of rupees, one wonders where such assessee has to look for sourcing of funds to buy the property as well as to pay capital gains tax on investment over ten crores of rupees.  Certainly this cannot be the intent of the law makers. Most of the senior citizens holding old and large houses, wanting to sell such houses and look for reinvestment in similar residential houses would certainly be put to extreme hardship if this artificial ceiling imposed by the Finance Bill becomes a law.

It is high time for the tax payers associations and similar bodies take up this cause to ensure such proposed ceiling is dropped in the ultimate Finance Act.