The real estate industry, which was looking forward to rapid development and growth in the real estate sector and infrastructure space ever since the NDA government took over at the Centre, got the pride of place in this Budget.
The deduction against the interest payment on home loan from the taxable income has been increased by finance minister Arun Jaitley in his Budget to Rs 2,00,000, up from Rs 1,50,000.
This will enable a home buyer to save an additional amount of Rs 15,450 from his tax liability.
The increase in the deduction will lead to lowering of interest rates. If one has taken a loan of only Rs 25,00,000 to buy a house at an interest rate of 10% for 20 years, his EMI will be around Rs 24,125, which is equivalent to Rs 2,89,500 annually .
Out of this, Rs 2,50,000 will go towards interest payment and the rest Rs 39,500 will be used for principle repayment. But at the same time, he can avail a deduction of Rs 2,00,000 from his taxable income as his interest payment is Rs 2,50,000 in the first year.
This will enable him to save Rs 61,800 from his tax liability as his income must be in the highest tax bracket of 30.9%. Therefore, the net tax out go after adjustment for the savings in tax will be only Rs 1,88,200. As the principle is Rs 25,00,000, the net interest rate for him will be only 7.53%. But if the borrowed amount increases, the net interest rate after adjusting for the tax savings will increase to come closer to the borrowed rate. If he borrows Rs 1,00,00,000 at 10% rate, the net interest rate will be 9.38%. This is mainly because of the fact that the tax benefit remains at Rs 61,800 only.
As the decision leads to lowering of the interest rates, this will increase the affordability of a buyer.
But as the rebate on housing loans is increased from the Rs 1.5 lakh to Rs 2 lakh, it will not benefit much those who buy a house of around Rs 1,00,00,000 which is the normal price of an apartment in the Delhi NCR cities, Mumbai, and Bangalore. Experts said that in a city where the minimum cost of a flat is over Rs 1 crore, the enhanced deduction would make little difference to a buyer.
Pankaj Kapoor of property research firm Liases Foras said it will only provide marginal relief for first-time buyers. “The rebate should have been much higher. In Mumbai, the aver age cost of a flat is Rs 1.20 crore. On this, the monthly EMI itself would be around Rs 1 lakh, of which 80% goes towards interest. This exemption is not enough to promote housing in Category 1 cities,“ Kapoor said.
Mukesh Pradhan, a property consultant, said the decision will benefit the salaried class to some extent. “But flat buyers in Tier II cities, where prices are comparatively much lower, will feel the difference,“ Pradhan said.
Abhishek Lodha, the MD of Lodha Group, said the increase won’t change anything for flat buyers in big cities like Mumbai.
“But it is an incremental difference for homes in the range of Rs 25 lakh to Rs 50 lakh, which are available in the Mumbai metropolitan region,“ Lodha said. Pranay Vakil of Praron Consultancy, says: “If you want to encourage housing, no matter what interest you are paying, it should be exempted from taxation. It’s a basic need.“
The industry demanded the deduction be set at a minimum of Rs 5,00,000, which could have covered repayment of loan of Rs 1,00,00,000 for quite some time.
Boman Irani, a developer, said the Budget proposal allowing corporate social responsibility (CSR) in slum redevelopment would create a big impact in Mumbai, where half the population lives in shanties. “Big companies could pump in at least a couple of thousand crores in slum projects,“ Irani said.
QUICK THE TAX PASS-THROUGH STATUS FOR REAL ESTATE INVESTMENT TRUSTS–TO AVOID DOUBLE TAXATION–WILL BRING IN MORE INVESTMENTS INTO THE SECTOR, BITES INDUSTRY EXPERTS SAID The finance minister’s vision for housing is the first positive signal that this government intends to listen to the real estate industry, Irani said.
The tax pass-through status for Real Estate Investment Trusts (REITs) to avoid double taxation will bring in more investments into the sector, industry experts said.
Neeraj Bansal, partner and head (real estate and construction) KPMG in India, said: “Incentivising REITs and granting pass-through status for taxation is an essential step for successful implementation of REITs in India. It will help in easing liquidity requirement for developers, paving way to raise capital and also provide access to retail investors to benefits from regular income and appreciation benefits from real estate.“
The Confederation of Real Estate Developers’ Associations of India (CREDAI)-the apex body for private real estate developers in India–is confident that with liberal norms for FDI and tax incentives for the REITs, besides the focus on low-cost housing, infrastructure development and the budget allocation of Rs 7,060 crores for development or upgradation of 100 smart cities along with the promise to deliver pucca housing for all by 2022 will bring in the much vaunted achhe din for the real estate sector.
C Shekar Reddy , CREDAI president, said: “Industry demand for easing the norms for the FDI in real estate sector has been accepted by the FM in the Budget and to encourage development of smart cities-which will also provide habitation for the neo-middle class–requirement of the builtup area for FDI is being reduced from 50,000 square metres to 20,000 square meters and capital conditions reduced from $10 million to $5 million, respectively, with a threeyear post completion lock in.“
If these projects commit at least 30% of the total project cost to affordable housing, the Budget said they would be exempted from minimum built-up area and capitalization requirements, with the condition of three-year lock in.
The relaxation in FDI norms for real estate will also open up a new stream of cheaper money for developers, experts said.
The limit for FDI has been reduced from 50,000 sq metres to 20,000 sq metres and the minimum investment from $10 million to $5 million. These provisions, Reddy said, will make more projects eligible for FDI funding and, more important, promote the affordable-housing segment.
“Apart from this, the government is also looking keen to make REITs more attrac tive and has proposed making it a vital tool to attract and encourage investments in the sector by providing tax incentives for REITs, as requested by us. This will en courage retail investors’ participation in commercial real estate and provide a source of funding to developers, helping improve liquidity and encourage them to undertake more projects,“ Reddy said.
(With inputs from Nauzer Bharucha in Mumbai)
QUICK BITES THE GOVERNMENT IS ALSO LOOKING KEEN TO MAKE REITS MORE ATTRACTIVE AND HAS PROPOSED MAKING IT A VITAL TOOL TO ATTRACT AND ENCOURAGE INVESTMENTS IN THE SECTOR BY PROVIDING TAX INCENTIVES FOR REITS
[FAST FACT] `THE BUDGET PROPOSAL ALLOWING CORPORATE SOCIAL RESPONSIBILITY (CSR) IN SLUM REDEVELOPMENT WILL CREATE A BIG IMPACT IN MUMBAI, WHERE HALF THE POPULATION LIVES IN SHANTIES’