Luxury realty market on fire with amendments to Section 54 and 54F set to kick in on April 1

Real estate experts say that there will be a flurry of high-end luxury deals

With just a few days to go for amendments to Section 54 and 54 F to take effect, there’s been a rush among high networth individuals to utilise the avenue to reduce their capital gains tax liability. Real estate consultants point out that in terms of growth, the registration of properties worth more than Rs 5 crore and above in Mumbai increased by 29 percent year-on-year in February 2023.

Real estate experts say that there will be a flurry of high-end luxury deals getting registered in the next few days as more HNIs reinvest proceeds to purchase luxury properties before April 1 as from that day onwards the long-term capital taxes exemption towards buying residential units will be capped at ₹10 crore. The March registration data is not yet out.

It should be noted that the government on February 1 imposed a limit of Rs 10 crore for deduction on long-term capital gains tax for reinvestment in residential properties under Section 54 and 54F of the Income Tax Act. No limit existed earlier. The new provision, according to the memorandum to the Finance Bill, seeks to prevent huge deductions claimed by high-networth assessees after buying high-end luxury houses.

The share of property registrations in Mumbai increased from 4 percent in February 2022 to 6 percent in February 2023. In terms of growth, the registration of properties worth Rs 5 crore and above increased by 29 percent year-on-year in February 2023. It should also be noted that the share in January 2022 was 4 percent and in January 2023 it was 5 percent, data collated by Knight Frank Research showed.

While the increase in apartments costing more than Rs 5 crore reflects the sustained strength of Mumbai’s premium market,  it is also influenced by the rush among homebuyers to utilise the avenue to reduce their capital gains tax liability, said Vivek Rathi, director-research, Knight Frank India.

Budget proposal 2023

There has been a flurry of property deals both in Mumbai and Delhi following the Budget proposal announcement on February 1, which is expected to have an impact on the sale of such properties from April 1. A Rs 10-crore cap has been imposed on the reinvestment of capital gains from the sale of long-term assets, including property. No such cap is applicable at the moment.

Budget 2023 has capped the deduction on capital gains on investment in residential property at Rs 10 crore. “For better targeting of tax concessions and exemptions, I propose to cap deduction from capital gains on investment in residential houses under Sections 54 and 54F to Rs 10 crore,” Finance Minister Nirmala Sitharaman had said in her Budget proposal for 2023-24.

Any capital gains arising from the sale of long-term assets, including residential houses, are now exempt from tax if the proceeds were invested in another residential property and there is no cap on the amount on which the deduction could be obtained. But under the new provisions, a cap of Rs 10 crore has been put on capital gains on which deduction will be available.

The memorandum to the Budget provisions said the primary objectives of the sections had been to mitigate the acute housing shortage and to give an 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,” it said.

In the last two years, in top metro cities such as Delhi, Mumbai and Bengaluru, tech entrepreneurs and corporate CXOs with hefty ESOPS have cashed out and joined the ranks of luxury homebuyers. For long, this market was dominated by industrialists and film stars. While upgrading to a better lifestyle in line with their aspirations and needs is the main reason to buy a luxury property, the other reason a section of businessmen were going in for  such purchases is to save on capital gains tax by investing in residential properties.

Top deals in Mumbai and Delhi

Madhav Goel, director of Tufropes, a leading manufacturer of synthetic fibre rope and netting solutions, had on March 23, bought a 9,546 sq ft apartment in the sea-facing Lodha Malabar project on Malabar Hill for Rs 121 crore. The apartment is located on the 19th floor of the luxury residential project Grand Palace Lodha Malabar on Walkeshwar Road. It was purchased from Macrotech Developers Ltd, a listed developer. The buyer has paid a stamp duty of ₹7.26 crore, according to documents accessed by Indextap.com. The transaction fetched a rate of around ₹1,26 lakh per sq ft.

Earlier, VR Medicare Pvt Ltd bought a bungalow in Mumbai for Rs 49.75 crore. The transaction was registered on March 1, 2023, documents accessed by Indextap showed.  The buyer has paid a security amount of Rs 2.98 crore. The area of the land is 10,872 sq ft and the carpet area of the bungalow is 4,523 sq ft. The ground plus two floors bungalow is located in Chembur, Mumbai.

On March 10, Bajaj Auto chairman Niraj Bajaj purchased a triplex apartment of over 18,008 sq ft on the top three floors of the project for ₹252.50 crore, setting the record for the costliest penthouse in the city. The transaction fetched a rate of ₹1,40,277 per sq ft on the total area.

Jai Mahtani, a non-resident Indian, has purchased an apartment in Morena House, located on the posh Carmichael Road in Mumbai, for Rs 83.37 crore, show documents accessed by IndexTap.com.

According to the documents, the unit is located on the third floor and the total carpet area is 5,211 sq ft. The buyer has paid a stamp duty of around Rs 5 crore.

Welspun Group chairman BK Goenka purchased a penthouse for Rs 230 crore only a few days after 28 housing units worth Rs 1,238 crore were bought by family members and associates of Radhakrishna Damani, founder of Avenue Supermarts, which runs the D’Mart chain of stores, in Mumbai recently. The price Goenka paid for the penthouse, in the same project as Damani, probably makes it the country’s most expensive sale of an apartment.

Amit Goyal, CEO of India Sotheby's International Realty, points out that there has been an increase of almost 20 percent in the number of high-end transactions being registered after the budget announcement compared to the same period last year. Buyers are out in the market looking for suitable options. Having said that, since the level of inventory is lower, not too many high-end deals are getting concluded.

“The March 31st deadline is more relevant for those who need to sell their properties or shares by that date. Buying can take place until July, when they file their tax returns,” he said, adding that once the limit kicks in beyond April 1, the market is likely to slow down and there may be an impact on property registration numbers as well. It’s a double whammy for the real estate market — on the one hand, promoter stake sales by PEs/VCs have reduced, and on the other, Section 54 and 54F is being limited to 10 crore," said Goyal.

In Delhi, RateGain founder Bhanu Chopra had recently bought an 850 sq m bungalow at Delhi’s Golf Links for Rs 127.5 crore. According to registry documents accessed by Zapkey, the property was registered on February 24. According to news reports, Maxop Engineering director Shailesh Arora had also purchased a 575 sq yard bungalow in Golf Links for Rs 68.5 crore.