In this blog, we are going to have a detailed discussion on various tax deductions introduced in budget 2023, including the new income tax regime. 

Capital Gains On Residential Properties Capped At Rs 10 Crores 

For starters, the government is now going to heavily tax individuals earning capital gains of more than Rs 10 crores by selling residential properties. As per the new provisions, a cap of Rs 10 crores has been introduced on capital gains on which tax deductions are applicable. 

As a result, if someone sells a house and the capital gains are more than Rs 10 crores, their maximum benefit will be retained at Rs 10 crores when purchasing another property. The rest will be deducted. 

This will primarily affect the sale of ultra-luxury properties in South Delhi and Mumbai. 

Plus, the sale of farmhouses with capital gains of more than Rs 10 crores, including the state revenue generated from property registrations will also be affected because of this amendment.

Here’s the thing; previously, an investor would offset the capital gains by investing the money acquired from selling one residential property into another more expensive one. There were no restrictions to prevent such transactions from being executed. 

However, the newly proposed budget has imposed a limit on this offset because now the same person would have to pay tax on any capital gains of more than Rs 10 crores.

It is safe to say that sellers of properties with high valuations should be careful while planning their transactions, or they might have to pay significantly increased taxes. 

Many believe that the cap of Rs 10 crores will not impact primary luxury housing sales as much as the resale luxury market. 

READ MORE: BUDGET 2023: WHAT BENEFITS CAN HOME BUYERS EXPECT?

Old Vs New Income Tax Regime

In comparison, the new income tax regime seems to be in the favor of the middle class. Under the updated income tax regime, those earning up to 7 lakhs are not required to pay tax. 

Moreover, the new tax regime includes a standard deduction of Rs 52,500, and the new concessional slab rates are applicable on the income of up to 15 lakhs. Let’s take a look at the new tax slabs for the fiscal year 2023-24; 

• Income of Rs 0-3 lakh: NIL
  
• Income of Rs 3-6 lakhs: 5%
  
• Income of Rs 6-9 lakhs: 10%
  
• Income of Rs 9-12 lakhs: 15%
  
• Income of Rs 12-15 lakhs: 20%
  
• Income of above Rs 15 lakhs: 30% 

Suppose you have an annual income of Rs 12 lakhs. Now, your income tax deductions will be divided according to the new slabs announced in the budget. This means that the first 3 lakhs will not be taxed, but you will have to pay a tax of 5% on the next 3 lakhs. Plus, a 10% income tax will be applicable on another 3 lakhs. Similarly, a 15% income tax rate will apply to another 3 lakhs of your income.  

So, here’s a breakdown of how much tax you will have to pay on an annual income of 12 lakhs; 

• Rs 0-3 lakhs – no income tax
  
• Rs 3-6 lakhs – Rs 15000 income tax
  
• Rs 6-9 lakhs – Rs 30000 income tax
  
• Rs 9-12 lakhs – Rs 45000 income tax
  

Hence, the total income tax you would have to pay according to the new income tax regime will be Rs 90,000, which is only 7.5% of your annual income of Rs 12 lakhs. 

Similarly, if anyone has an annual income of more than Rs 15 lakhs, they will have to have Rs 150,000 income tax + 30% on any additional income above Rs 15 lakhs. 

You can use the same method to work up your annual income tax if your yearly income is 9 lakhs, 15 lakhs, or above. It’s time to get your income tax calculator out to do the required calculations.

Furthermore, the Finance Minister did not forget about the individuals earning more than Rs 5 crores annually because the new budget also offers them notable tax relief. As a result, the income tax rate for individuals making an annual income above Rs 5 crores is now 39% instead of 42.74%. 

To compare the old tax regime with the new one, the former offered a rebate of Rs 12,500 if an individual’s annual income is up to Rs 5 lakhs. On the other hand, the new tax regime offers a rebate of Rs 25000, provided that your income does not exceed Rs 7 lakhs. However, the standard tax deductions remain the same in both tax regimes. 

Finance Minister Nirmala Sitharaman stated that the new tax income regime is going to be the default choice for the taxpayer while the old one will be optional. Sticking to the old income tax regime is advisable if you enjoy certain exemptions and deductions. 

But those who don’t need to pay house rent, have no home loan, and do not avail of any other exemptions should opt for the new income tax regime. 

Angel Tax Now Applicable On Non-Resident Investors

Non-resident investors are also subject to angel tax from now on, as stated in the recently announced budget. But before we dive into the details of this amendment, let’s help you learn about angel tax to clear your confusion.  

Angel tax is the term popularly used within startup circles to refer to Section 52 (2)(viib) of the Income Tax Act. According to this, if a closely-held company issues shares at a price higher than its fair market value, the premium income earned by the company is taxed. 

Previously, this was only applicable to resident investors to tackle the issue of money laundering, but the new budget has expanded it to non-resident investors. 

What’s important to note here is that this update will ultimately affect foreign investments and create additional legalities. Experts believe that many entrepreneurs might consider moving overseas to a country where such laws do not exist. 

Startups are now supposed to justify foreign investments while paying taxes on the premium income earned by issuing shares at prices above their fair market value. 

However, DPIIT-recognized startups with IMB certification, short for Inter-Ministerial Board, are exempt from this amendment.  

Did you know that the economy of India has jumped from the 10th largest to the 5th largest economy in the world in the last 9 years? The new income tax regime, combined with other amendments introduced in the budget 2023 is expected to help India’s economy grow even more than it has in the past years, as claimed by the Finance Minister. 

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There, you will find highly modernised residential projects in Gurgaon with different sizes of residential plots and low-rise terrace homes. 

Want to invest in your future? Contact ACE Group for more information. 

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Let’s find out what industry experts have to say.

1. Focused tax deduction on housing loan principal repayments (Section 80 C)

Currently, Section 80 C of the Income Tax Act does not offer a focused benefit on housing which is the highest and most essential spending item for most taxpayers throughout their careers. Investors too have a number of investment opportunities, so the lack of a unique tax benefit on the principal amount of loans ultimately discourages them from investing in real estate. Home loan applicants will benefit greatly from a separate annual deduction of INR 150,000 for principal payments, which will help to increase housing affordability.

2. Raising the section 24 home loan deduction cap

The current limit for the Section 24 house loan interest deduction is INR 2 lakh. To enhance affordability and housing sales, this should be raised to INR 5 lakh.

3. Easing of capital gains requirements to aid homebuyers and increase affordability

According to section 54 of the Income Tax Act, long-term capital gains from the sale of an existing property may be used to purchase or construct a new home. If the investment qualifies for the exemption through a property that is still under construction, the investment can only be claimed if the property is completed within three years of the sale of the previous residence.

Residential construction projects are getting bigger in terms of the number of units, height, and amenities, which causes completion dates to be longer than three years. Furthermore, even if the implementation of RERA has brought about a significant improvement, completion dates for ongoing projects frequently go over the allotted time. This makes it challenging for purchasers of homes still under construction to write off capital gains. Experts recommend that the current three-year completion deadline for houses that are under development be extended to five years in order to remedy this.

Let’s now move towards a few issues highlighted by experts and their recommendations to overcome these.

Issue #1 – Making affordable housing projects more financially viable.

What Experts Recommend:

The deadline for registering an affordable housing project to receive a tax break under section 80IBA has lapsed. The section 80IBA registration timeline must be reintroduced.

What Are Their Justification:

Section 80IBA provided a 100% tax exemption for affordable housing projects that were approved through March 31, 2022. This clause stipulated that, subject to certain restrictions, such as the approval date, developers could claim a 100% tax exemption on earnings.

As per industry experts, it is critical to resurrect this measure since it is undoubtedly the most physically meaningful measure for increasing the viability of affordable housing projects.

Issue #2 – Rental housing in the affordable sector requires a boost.

What Experts Recommend:

100% exemption for rental income up to INR 3 lakh for houses up to INR 50 lakh.

What Are Their Justification:

This would encourage people to invest in the inexpensive housing segment, which is suffering from a severe housing scarcity. Owners of such houses avoid renting them out due to the low rent yields. This tactic will clearly encourage such property owners to rent out their residences to the targeted demographic, supporting efforts to increase the supply of housing in this market.

The Budget Session of the Parliament will commence on 31st January, 2023.

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