Budget 2017 brought good news for the real estate sector. It was imperative as the sector was adversely affected by demonetization. It was good to see that the central government has continued its focus on real estate reforms and housing for all mission.
Key highlights of budget affecting real estate directly or indirectly were:
A) Changes in Affordable Housing
Central Government finally awarded Infrastructure status to Affordable Housing, which will reduce cost of borrowing as well as increase access to institutional investors base for the builders.
In the last year’s budget, houses of up to 30 square meter (built-up area) in the top four cities and 60 square meter (built-up area) in other cities, were allowed 100% tax deduction on profits. This year’s budget changed it to 30 square meter limit only in case of municipal limits of top four metros and 60 square meter for rest of the country including in the peripheral areas of metros. This will boost affordable housing projects even in metros.
Additionally, the definition of area limit has been changed from “built up area” to “carpet area”. Usually built up area is almost 20 to 30% more than carpet area. So from an earlier limit of, say, 60 square meters of built up area for affordable housing, it has now increased up to 80 square meters of built up area – that’s a huge jump! This will not only bring in additional projects in affordable housing limits but also incentivize builders to look at affordable housing segment seriously.
Also, as per previous budget, in order to be eligible for affordable housing, the project was to be completed within three years of commencement. Budget 2017 has increased this period from three years to five years. Builders can now look forward to raise long term capital at lower costs which , hopefully will be passed on to buyers.
B) Lowering of Personal Taxes
Personal income tax for income between Rs. 2.5 Lakhs to Rs. 5 Lakhs has been reduced from 10% to 5%. That’s a saving of Rs. 12,500/- annually or Rs. 1000/- per month. For affordable housing where interest rates are being subsidized by up to 4% this amounts to additional borrowing of Rs. 1.5 Lakhs. This is again a big boost to affordable housing in urban areas.
C) Reducing Long Term Capital Holding Period
Budget 2017 reduced the tenure to claim tax benefits under long term capital gains from three years to two years. I am not sure what benefits it shall serve to buyers (not investors) except increasing speculation in the property market. Investors would be quite happy with this change.
D) Tax Relief to Builders
Prior to the budget, unsold but completed inventory with completion certificate were subject to tax at a notional rental income. Builders for whom constructed buildings are stock-in-trade, Budget 2017 proposed to apply this rule after one year from the date of receipt of completion certificate. The holding period for land and buildings has also been reduced to two years from three years. This measure will provide one year breathing period for builders to liquidate their inventory.
E) Tax Relief to Landowners
Capital gains tax for landowners on the execution of Joint Development Agreement has been a nightmare for landowners, who are primarily agriculturists and have no means to pay these taxes. Earlier the land owners had to evaluate the price of the land held while entering into an agreement with the builder and pay the tax on the notional gains. In most case builders used to end up paying taxes and adjust it from landowners share of revenues.
Now, for joint development agreements (JDAs) signed for development of property, the liability to pay capital gains tax will arise in the year the project is completed. This will encourage more landowners to get into JDAs with builders as there is no immediate tax liability.
It is quite clear that central government is committed to the idea of Housing for All mission as most of the reforms in this budget were targeted at affordable housing segment. Rightly so, as there is a huge mismatch in demand and supply for affordable housing. Additionally, the government appeared to be taking a lot of measures in providing incentives to spur the economy in order to counter the impact of demonetisation.