Tax exemption boosts luxury home sales

Start-up owners are buying top-end properties to protect their monies. However, as with most things in life, conditions apply 

Akaash Chaudhary, co-founder and MD of Aakash Educational Services, recently bought a bungalow for a whopping Rs 137 crore in New Delhi’s diplomatic enclave, Kautilya Marg. Zishaan Hayath, the founder of Toppr.com, purchased a sea-facing apartment in Mumbai for Rs 41 crore. Both ventures were acquired last year by edtech firm Byju’s.

Akaash and Zishaan are part of a long list  of start-up founders who’ve decided to  buy an uber luxury residential property,  adding the much needed mojo to India’s luxury housing.

According to media reports, last September, Umang Bedi, co-founder of VerSe Innovation, which owns Dailyhunt and short video app Josh, bought a villa in Bengaluru worth Rs 16.5 crore. Abhinay Choudhari, co-founder of online grocery platform BigBasket, also bought a house for Rs 12.25 crore in the same project. This came on the heels of Tata Digital acquiring a majority stake in Supermarket Grocery Supplies, which owns BigBasket.

In the last two years, in top metros cities like Delhi, Mumbai, and Bengaluru, tech entrepreneurs and corporate CXOs with hefty ESOPS have cashed out and joined the ranks of luxury home buyers. For long, this market was dominated by industrialists and film stars.

While upgrading to a better lifestyle in line with their aspirations and needs are the top reasons to buy a luxury property, the other reason why a section of successful people go for such purchases is to save on capital gain tax by investing the money in residential properties.

We at India Sotheby’s International Realty have facilitated many such transactions in the last two years.

Here is an easy-to-understand explanation of how the tax exemption under section 54 F of the Income Tax Act, 1961, works.

The tax exemption

Gains from sale of listed equities within one year of purchase are considered short-term capital gains (STCG). If sold after a year, the gains are considered long-term capital gains (LTCG).

While STCG is taxed at 15 percent, LTCG above Rs 1 lakh a year is taxed at 10 percent. However, both the holding period and the tax increase substantially in case of unlisted shares, which is the case with many start-up equity sales.

Gains from unlisted equity shares are considered long-term if the duration of holding is more than two years, and the rate of tax is 20 percent (with indexation benefit). If the duration is less than two years, it is considered STCG and is taxed per applicable slabs, exclusive of surcharge and cess.

However, tax on LTCG from equities (listed and non-listed) can be avoided under section 54 F of the Income Tax Act by investing the gains in a residential property.

After all, it helps to avoid a 20 percent tax, plus applicable surcharge and cess. Which can be a substantial amount of money.

However, as always, conditions apply. To claim the exemption, one should  have purchased the property within one year before the sale of equity, or two years after. If constructing a house, it must be completed within three years from the date of sale.

One can keep the proceeds in a bank in a capital gains account if one cannot purchase a property before the date of filing returns, and can still avail of the LTCG benefits provided one makes the purchase within the given time.

However, as on the date of sale, a person should not own more than one residential property—the one that was bought to claim exemption.

Further, one should not sell the house within three years of purchase, as the tax exemption will be revoked in that case.

Given that India celebrated its 100th unicorn last May, and that with approximately 70,000 start-ups we have the third-largest start-up ecosystem in the world, Sotheby’s believes the luxury housing market will continue to thrive.

According to this year’s India Sotheby’s Luxury Outlook Survey, a fourth of HNIs said they had bought property during the pandemic. An overwhelming 67 per cent of them said they were keen to buy a residential property in 2022, citing lifestyle upgrades and a good investment opportunity as the top reasons.

We believe start-up founders will continue to expand India’s luxury housing market.
Amit Goyal is CEO at India Sotheby’s International Realty
first published: Sep 3, 2022 01:31 pm
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