Setback to Investment in Residential Houses: Union Budget 2023 Proposes Capital Gain Exemption Limit u/s 54 and 54F [Read Finance Bill]

In the Union Budget 2023, the Union Finance Minister Nirmala Sitharaman has proposed the exemption limit of the Capital Gain under section 54 and Section 54F of the Income Tax Act, 1961.

According to the budget speech, tax on capital gains can be avoided by investing proceeds of such gains in residential property. This is proposed to be capped at ` 10 crores’.

The tax on capital gains would be avoided by investing the earnings in residential real estate, according to the budget for 2023. The cap for such investments is set at 10 crores. Only gains up to and no more than Rs. 10 crore are eligible for the exemption.

A person or HUF can claim exemption from such capital gains under Section 54 of the Income Tax Act if they spend the proceeds in the acquisition, such as the purchase or construction of another residential property.

According to the Finance Act of 2014, the Capital Gains Exemption is only applicable if it is used to fund the building or purchase of a single residential home. Number of how many homes a person already owns, if he utilises the capital gain to build or buy a single residential home, he qualifies for a capital gains exemption.

According to section 54, when an assessee sells a residential property, which is a long term capital asset, and buys another residential house property, he or she is eligible to claim an exemption for taxation. To avail of this exemption the individuals must satisfy the following conditions:

• Only individuals or HUF are eligible to claim this benefit. The companies cannot reap the benefits of this section.
• The house property; taxpayer is selling should be a long term capital asset.
• The property that is to be sold should be a residential house. Income from this property should be charged under the head income from house property.
• The new residential property should be acquired either one year before the transfer date or two years following the transfer date. If a new home is being built, the owner is permitted an additional three years from the date of transfer or sale to complete the project.
• The house property that is bought should be in India.

Additionally, section 54F stipulates that capital gains on the sale or transfer of capital assets, such as real estate, are taxable in the hands of the taxpayer. In accordance with Section 54F of the Income Tax Act of 1961, long-term capital gains on the sale of any capital asset other than a house property are exempt from taxation.

Conclusively, the budget fixed the limit of 10 crores and both the sections are confined to the limit. The limit can be useful for the middle class people and not for high income people who have sale proceeds beyond 10 Crores.

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