India’s real estate sector has been in the doldrums for a while now, despite the Narendra Modi government’s efforts to resuscitate it.
The government’s list of measures include the introduction of the Real Estate (Regulation and Development) Act, 2016 (RERA), the granting of infrastructure status to affordable housing in 2017, and the introduction of Real Estate Investment Trusts (REITS).
Still, significant challenges remain. But there are a few things that finance minister Arun Jaitley can do to help the sector in his upcoming budget on Feb. 01:
Industry status: The sector has been seeking industry status for the past many years. If the wish is granted in the upcoming budget, real estate will be recognised as a priority sector. With that, developers will be able to obtain loans at lower interest rates and the cost of construction will come down, thereby allowing projects to be priced more affordably for end users.
Tax benefits to developers: The Confederation of Real Estate Developers’ Association of India (CREDAI), in its memorandum submitted to the finance ministry, has recommended amendments to Section 80-IBA of the Finance Act, which deals with deduction in respect of profits and gains from affordable housing projects. This will help developers to better avail the benefits provided in the section.
CREDAI and the Maharashtra Chamber of Housing Industry (MCHI), in their representations to the government, have also recommended that the rate of goods and services tax (GST) should be substantially reduced to 6% on leasing to a developer who constructs a building for the purpose of leasing. This is because no input credit is available on procurement of goods and services for the construction of such buildings.
CREDAI and MCHI have also suggested to the government that higher deductions, between 50% and 60%, should be allowed for developers towards the cost of the land. The prevailing deduction of 33%, at least in metro cities where the land prices and land-related premiums are exorbitant, isn’t enough. This can help bring down the cost of construction.
Direct tax benefits to home buyers: The Finance Act 2017 set at Rs2 lakh the restriction on loss from house property that could be set off against other income. Anything in excess of this limit would have to be carried forward and adjusted against rental income in future years. Given the rising cost of property and loan rates in India, this limit must be increased to allow tax payers to set off a larger part of the house property loss against other income. Otherwise, many salaried persons are discouraged from investing in more than one property.
Moreover, Section 54F of the Finance Act restricts the exemption from capital gains only in case of investment in one residential house. CREDAI has recommended amendment to the section, suggesting that such exemption should be made available for investment in more than one property. This could help improve affordability for both rental housing and secondary sales.
It is also suggested that the Rs1.5 lakh ceiling for deduction for principal repayment of housing loan in Section 80C be raised. Otherwise, as it stands now, the deduction is insignificant, especially when clubbed with other tax-saving instruments.
It would help the sector if the benefit of Section 80EE of the Income Tax Act is extended. The rules provided an additional deduction of Rs50,000 for first-time home buyers whose housing loan was sanctioned between April 2016 and March 2017. The pre-condition attached to this benefit, that the value of the property should not be more than Rs50 lakh, should also be removed, so that individuals who buy houses in Tier 1 cities can take advantage.
Indirect tax benefits to home buyers: The current levy of GST on under-construction projects is very high, which is eventually passed on to the consumer, making houses unaffordable. Further, the GST is not the only levy on such property, as there is an element of stamp duty as well, which is imposed by the respective state governments. Together, these increase the overall cost for the buyer by approximately between 18% and 20%.
CREDAI and MCHI have suggested that the government should consider appropriate reduction in the GST rates on under-construction projects.
Tax benefits to owners in joint development: The new Section 45(5A) that was added to the Income Tax Act brought about some much-needed clarity on the timing of capital gains levy and the manner of computing capital gains when one enters into a joint development agreement. However, it was made applicable only to landowners who are either individuals or belong to a Hindu Undivided Family. This was rather unfortunate and developers who own the land for certain projects are hoping that the benefit of this section is made available to companies, partnership firms, LLP’s, etc. since such entities, too, hold large land parcels.