Budget 2023 #4 - CG tax exemption - Super rich, super tax

“Super rich? Here is super tax”

Today, we look at one amendment which proves that the Government is proactively reading news articles.

What is the law now?

If you sell a residential house or shares in a company and earn huge capital gains, then you are liable to pay capital gains.

But if you invest the money in a residential house (subject to few conditions), the entire amount of capital gains would be tax exempt.

This provision was originally introduced in order to ensure availability of housing for everyone.

But, the super rich were misusing it to save tax.

There were news reports everyday that various super rich businessmen and startup owners were buying luxurious house properties worth tens of crores in a South Mumbai/ Delhi etc

They were using this exact exemption to avoid capital gains taxes on sale of the shares in their startup.

Since they were technically investing in a residential house, they were not liable to capital gains tax.

What is proposed by Budget 2023?

The capital gains exemption cannot exceed INR 10 crores. So the taxpayer will end up paying capital gains tax on the amount exceeding Rs 10 crores.

Observations/ Verdict –

This is a favourable amendment from the Treasury’s perspective but raises a few important questions –

1. The market for luxury homes is already stagnant (the supply is much higher than the demand). This amendment will affect the market even further w.e.f 1 April 2023.

2. Section 54/ 54F provide for withdrawal of exemption in case the new asset (residential house) is sold within 3 years i.e. the cost of acquisition of the house will be considered as 0. If the asset (where cost is restricted to INR 10 crores) is sold within 3 years, the taxpayer will have to pay taxes on the entire sale consideration, which does not seem to be the intent of the law. A consequential amendment should be made in this provision as well.

3. Seemingly, the limit of INR 10 crores is per person and not per asset. So if an asset which was held in a joint ownership is sold and a new asset is purchased in joint ownership too, it will prompt misuse of this exemption which is not line with the Government’s intention.

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.