Proposal to rollover capital gains for two properties is deeply flawed: Don't uncork bubbly yet, there is a catch here

  • The proposal comes with a rider—the LTCG from the original house should not exceed Rs 2 crore

  • There must at least be a condition that the rollover exemption can be claimed only once in five years or even ten years

  • Section 54 is flawed since inception—it allows limitless rollover during the lifetime of a taxpayer

Finance Bill 2019 contains a couple of proposals on the housing front. One of them is to allow reinvestment of long-term capital gains (LTCG) from sale of a residential house in not just one house within the prescribed time as is the case now but at the option of the assessee in two.

The idea at first blush appeared impressive—to allow one the freedom of acquiring two houses, one for self—living in retired contentment, and another for children who live close to place of work or with a long-term vision to house two children separately in order to avoid family strife that is almost inevitable in joint families.

But then it is always better to rethink first on surface impressions. The proposal comes with a rider—the LTCG from the original house should not exceed Rs 2 crore. It means if a person sells his modest flat for Rs 4 crore in Mumbai, the indexed cost of which is Rs 1.9 crore, he does not make the grade for this latitude to invest in two houses because his LTCG is Rs 2.1 crore.

If a wealthy person sells his huge and sprawling bungalow in Mumbai for Rs 200 crore, the indexed cost of which is Rs 198.1 crore, then he makes the grade because his LTCG stays within the Rs 2 crore-mark, Rs 1.9 crore to be precise. This is turning on the head the fundamental canon of direct taxation—tax the rich. This anomaly has resulted because of the misplaced accent on LTCG whereas the accent should have been on the sale price.

Instead of putting an Rs 2 crore cap on LTCG, the interim finance minister Piyush Goyal should have put a cap on the selling price of the original house at say Rs 4 crore. Had this been done, the first person would have made the grade and the second elbowed out in the above example. Direct taxes indeed should be about giving a helping hand to the middle class while taxing the rich. As it is, in the example on hand, an undeserving person is going to be allowed to invest the proceeds of the sale of his original house—Rs 200 crore in two houses, may be two sprawling bungalows whereas the deserving one with proceeds of Rs 4 crore would be denied this latitude.

 Proposal to rollover capital gains for two properties is deeply flawed: Dont uncork bubbly yet, there is a catch here

Representational image.
Reuters

Indeed Section 54 right from the inception has been flawed—it has allowed limitless rollover during the lifetime of a taxpayer. It is only interim Budget 2019 proposal which says the option to rollover in two residential properties is once-in-a-lifetime opportunity and that once exercised, the freedom to do so in future is foreclosed. No such admonition all along for rolling over in one residential house. With the result, a moneybag can merrily claim Section 54 benefit every year if he wants.

There must at least be a condition that the rollover exemption can be claimed only once in five years or even ten years lest a professional property-hopper is given the income tax leg-up. Now that the definition of long-term residential house is two years as opposed to three years earlier, there is an imperative need to rein in professional property-hoppers.

Our direct tax laws have always been flawed when it came to immovable properties. The wealth tax law when it existed treated a Janata flat at par with a sprawling bungalow----an assessee could choose any one house of his choice for full exemption. If the first person had two Janata flats each valued at Rs 1 crore, one crore would have been brought into the tax net whereas the sprawling bungalow valued at say Rs 100 crore would have thumbed its nose at the taxman.

Only section 80IB follows the correct course---it gives tax holiday to builders of only the modest middle class houses, with 1000 square feet being the upper limit for Delhi and Mumbai.

(The author is a senior columnist and tweets @smurlidharan)

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Updated Date: Feb 06, 2019 11:32:13 IST