The real estate sector had a huge wish list for the Finance Minister and a few things recommended by market players have seen the light of the day. Needless to say, affordable housing, which received infrastructure status, stole the show in this year's Budget. While there are quite a few reasons to cheer, there are some aspects on which the Budget was silent, says Liases Foras Real Estate Ratings and Research Pvt Ltd in a note.
According to the research report, there was no further clarity on goods and services tax (GST) or tax norms for real estate investment trusts (REITs) in the Budget. "It is indeed laudable that second-time home buyers have been dissuaded, but it would have been even better if the first-time home buyers had been given interest exemption to a greater limit. Another issue, which demanded some attention, was the Land Acquisition Bill. Exorbitant rate of land is the biggest issue plaguing real estate and ensuring its productivity would bring greater efficiency in the real estate sector. We can only hope that the next budget will see some of these issues being brought to light and addressed effectively," the non-brokerage research centric firm says.
The housing sector saw a gamut of policies that aimed at providing a demand side as well as supply side impetus to affordable housing. Coupled with this, Liases Foras says, there was much-needed focus on infrastructure, digitisation of transactions and rural housing.
Infrastructure status to affordable housing
Affordable Housing finally got infrastructure status. The Indian realty sector had been mooting this move for the longest possible time and it could not be happier. So, the direct impact of infrastructure status to affordable housing means easier availability of funding. Developers can now have access to funds at lower rates and for longer terms. Moreover, this also implies more investment from external commercial borrowings (ECBs) and insurance funds.
Liases Foras says, "The demand for affordable housing is huge and, with a move like this, we hope to see more supply of affordable housing to bridge the gap. Infrastructure status also means speedier sanctions and approvals. However, it would be appreciated if the term 'affordable housing' is more clearly defined in this context. The lesser the areas of doubt, the more the positive impact of the policy."
However, it says, going by the last updated definition of Reserve Bank of India (RBI), "Affordable segment means in the non-metros the loan amount would be Rs40 lakh for the property value of Rs50 lakh, and in the metros the loan amount would be Rs50 lakh for the property value of Rs65 lakh. There are six metros in the country: Mumbai, Chennai, Kolkata, Delhi, Hyderabad and Bangalore."
If we do an impact analysis we can see that around 60% of the supply in India (Tier I and Tier II combined) falls in the affordable housing segment. Hence, the proposal to give infrastructure status to affordable housing is expected to have a big impact on the Indian real estate, it added.
Carpet area replaces Built-up area in Section 80 IB
The Section 80 IB recommended last year stated that exemption from service tax will be provided on construction of affordable houses up to 60 square metres under any scheme of the Central or State Government including public-private partnership (PPP) schemes. However, the area mentioned was built-up area. This year that has been changed to carpet area and this increases the area covered by 30%. He also said that the 30sq mt limit will apply only in case of municipal limits of four metropolitan cities while for the rest of the country including in the peripheral areas of metros, a limit of 60 sq mt will apply.
Furthermore, the Finance Minister also proposed to extend the completion period of the building of the houses after commencement under the Scheme to five years from the present three years.
Extension for consideration period for tax on unoccupied houses
Currently, the houses, which are unoccupied after getting completion certificates, are subject to tax on notional rental income. For developers for whom the constructed buildings are stock-in-trade, Finance Minister Arun Jaitley proposed to apply this rule only after the end of the year in which completion certificate is received so as to give the builders a reasonable time frame for liquidating their inventory.
Change in holding period for long term capital gains
The Union budget proposed to reduce the holding period for considering gain from immovable property to be long term to two years from the present three years and the base year for indexation to be shifted from 1 April 1981 to 1 April 2001. "This is an investor- friendly move, which reduces the capital gains tax liability while encouraging the mobility of assets," Liases Foras says.
The Government also suggested financial instruments such as infrastructure bonds in which the capital gains can be invested and tax payment can be avoided.
As for Joint Development Agreements signed for development of property, the liability to pay capital gains tax will arise in the year of completion for the project.
Some good news for Andhra Pradesh
For the new Capital of the State of Andhra Pradesh, which is being constructed by an innovative land-pooling mechanism without use of the Land Acquisition Act, the Union Finance Minister proposed to exempt from capital gains tax, all those who were holding land on 2 June 2014 - the date on which the State of Andhra Pradesh was re-organised - and whose land is being pooled for creation of the capital city under the Government Scheme.
Attempt to dissuade investors
Finally, the best one was saved for the last. The government has put in a limit of Rs2 lakh on set-off of loss from house property with income from other heads. In the earlier provision, 100% of loss occurring in house property was allowed to be adjusted against income from salary or business or profession. Because of these provisions, investment in real estate was considered a tax saving tool.
Since the prevailing rental yields are only 2% while the interest rate has been at 9-10%, purchasing second and more properties used to be a big incentive for investors. So now, investor participation in the market will be curtailed. This is a paradigm change in real estate practices which has hitherto been heavily dependent on investors, the a non-brokerage research centric firm concluded.