BUDGET 2023 AMENDMENTS – A DAMPENER IN HNI’S HOUSING DREAMS?

The proposals in Finance Bill 2023 relating to Income-tax amendments can be widely considered to have received mixed reactions from the high-net-worth individual (HNI) community. While the move of reducing the highest surcharge rate from 37% to 25%, effectively reducing the total tax rate from 42.74% to 39% was widely celebrated; the restriction imposed on capital gains exemptions to INR 100mn with respect to reinvestment in residential property and increase in TCS rate on foreign remittances to 20% have left a bitter-sweet taste.

The Government had introduced sections 54 and 54F under the Income Tax Act, 1961 to provide relief from taxability of long-term capital gains to Individuals and HUFs from the sale of residential house property or any other asset respectively, where such long-term capital gains were reinvested in residential house property within specified time limits. The said relief/exemption until now was allowed without any restriction/cap based on reinvestment criteria. 

The main intent behind providing the said exemption was to mitigate the issue of acute shortage of housing and give an impetus to house-building activity. However, repercussions of the COVID-19 pandemic which lead to hybrid work mode resulted in a spike in interest in luxurious houses by HNI’s. Further, it was observed that claims of huge deductions by HNIs were being made under these provisions, by purchasing very expensive residential houses. Also, in several venture capital and private equity transactions, the promoter sellers being Individuals and HUFs saved taxes on long-term capital gains from exits by investing in residential house properties. 

Hence, the same was defeating the very purpose of allowing exemptions. Also, allowance of exemption without any cap also leads to most of HNIs' wealth getting focused in the residential real estate sector which in turn resulted in a high spike in home prices being in demand from HNIs thereby putting off middle/ salaried class buyers who longed for affordable houses.

Accordingly, in order to plug the gap and allow the rightful exemption to taxpayers from long-term capital gains taxability, the limit of claiming deduction by way of reinvestment in residential house property is proposed to be capped at INR 100mn.

The said move from the Government can also be viewed from the angle of widening the tax base which was also one of the seven focus points of the Budget. In this regard, it is noteworthy to observe that as per a survey conducted by India Sotheby's International Realty, which sought responses from over 200 HNIs, 89% (out of the 76% that responded in affirmative) said that they would look to buy residential property rather than commercial property. Further, within the choices of buying residential real estate, a city apartment in the range of INR 100-250mn topped the charts, being 34%. The survey further indicated that 67% of HNIs were planning to buy a luxury property in the next two years. 

Separately, recent trends reflect the high interest of the HNI community in the overseas real estate market with significant investments. It is noteworthy to mention that as per the Asia-Pacific Wealth Report, statistics point to Indians being the highest investors in foreign real estate, with a 50% share. Also, the recent data on real estate investments in the UAE in 2022 reveal the sale of residential properties to Indians amounting to INR 355,000mn, being 40% of the market share.

Being cognizant of these latest trends, the Government has also proposed to increase the rate of Tax Collection at Source (TCS) from 5% for remittances exceeding INR 7lakhs to now 20% without any remittance limit. The said move has left the HNI community sweating considering the heavy impact it will have on overseas real estate investments.

To summarise, the proposal capping capital gains exemption to INR 100mn can be rightly seen in the direction of upholding the objective to arrest the unbridled rise in property prices and mitigate acute housing shortage in line with Pradhan Mantri Awas Yojna; while at the same time expanding tax base for the Government in the ever-expanding untapped real estate market dominated by HNIs. Further, it would also be interesting to observe the unfolding impact of the proposed increase in TCS rate to 20% on overseas real estate investment. 

Source: Livemint