Housing and budgetary impact on redevelopment

In the recent budget, the limit on reinvesting in a home to claim long-term capital gains exemptions on a home sale (Section 54) or sale of any other property (Section 54F) is introduced. output is limited to $10 billion. This limit of $10 crore is proposed to apply from the assessment year 2024-25, i.e. to taxable capital gains from fiscal year 2023-24 onwards.

The budget memo outlined the rationale for the introduction of this cap. “The primary goal of section 54 and section 54F of the Act is to alleviate severe housing shortages and create momentum for housing construction. However, it has been observed that claims of huge deductions due to high net worth is being made under these terms, by purchasing very expensive residential homes. It’s defeating the purpose of these parts.”

One category of sellers that will be significantly impacted are those entering into redevelopment agreements for their existing homes. In the event the home is in dilapidated condition and needs to be rebuilt, lacking funds to rebuild itself, the homeowner will enter into a redevelopment agreement with a builder under which the owner will be consider, the same area of ​​newly built space as that house. previously occupied by him until development. The only benefit the homeowner has is a new construction to replace his dilapidated old house, the same area or slightly larger.

In such cases, the homeowner does not end up paying any taxes because he has transferred an existing home and purchased a new residential home. At best, if he had some extra money, he would end up paying capital gains tax on that money.

Once modified, the position in such cases would be that the homeowner may be subject to capital gains tax, even if he does not receive the money, if the value of his new home exceeds $10 billion. Therefore, the homeowner may necessarily need to raise funds from his other sources to pay capital gains tax, if he does not receive any funds. This amendment will therefore act as a significant deterrent to the development of older homes, especially inherited homes.

This amendment could also affect housing associations’ redevelopment cases, especially in expensive locations where the value of new apartments received by members exceeds $10 billion. Such members may also need to review their possible capital gains tax liability, even though they may just receive a new unit in lieu of their current one.

This amendment is therefore very unfortunate for redevelopment cases, where the taxpayer may have to pay taxes on a nominal gain he did not actually receive in monetary terms.

The worst part is that this amendment could affect individual taxpayers who have entered into such agreements to redevelop their old homes prior to the modification, but construction is not yet complete. . This is due to the fact that in such cases there is a provision stating that the capital gains tax liability arises only on the completion of the construction of the new building, i.e. upon receipt of a professional certificate or certificate. completed only, as the case may be, and did not enter into a redevelopment agreement, as in the case of other taxpayers.

This provision, when introduced a few years ago, was intended to benefit such individual (and non-Hindu family) taxpayers, deferring their liability for interest tax. capital for a year in which they have a new home. This favorable provision will now become disadvantageous and may now affect taxpayers who entered into redevelopment agreements prior to the amendment, but who will be taxed on capital gains in the future. any year after the amendment. It is likely that the benefit of such a tax exemption for such taxpayers will now be limited to the cost of a new home only. $10 crore, and does not extend to the full value of such new homes, as predicted when they signed the redevelopment agreement.

While taxpayers may claim that they have been entitled to a larger exemption when entering into a redevelopment agreement, this cannot be limited by a subsequent amendment, the matter will most likely be resolved for litigation. In the interest of fairness, it is necessary that the amendment does not apply to those cases where a registered redevelopment agreement was entered into before February 1.

Gautam Nayak is a partner of CNK & Associates LLP.

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