The global recession due to the COVID pandemic compelled the middle class to save as much money and look either for an alternative income source or look for an assured long-term financial security. As far as secured investment is concerned, real estate has always remained a preferred choice and a win-win situation, as it also provides second source of income as rents.
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There is no doubt that the middle class has been consistently pushing the Indian economy and has been also looking to increase its disposable income to increase its investment in the real estate, particularly the residential sector. It is also true that this investment can grow multi-fold if the Union Budget-2023 brings in considerable relaxation in tax benefits on home loans – as the income tax slabs have not changed since the last 8 years. The recent increases in home loan rates due to the upward revision in repo rates by RBI has also deterred many decisions in property buying, though to some extent the momentum set by the aspirational Gen-Z and millennials of middle class still continues to drive the market.
The fear of job security, that prevailed during and post COVID pandemic, resulted in increase in the savings balance across all Indian banks. In a report by SBI, it is mentioned that the households in India saved a massive Rs 7.1 lakh crore during FY21. The rate of growth has been so rapid that Indian household savings have gone up from Rs.15 lakh crores in 2015 to Rs. 31 lakh crores in 2021. It also says that the estimated house-hold debt has declined from 37.3% in FY21 to 34% in Q1FY22 with the rise in GDP.
It is not that the salaried class is not spending, they are. As per the World Economic Forum (WEF), there is a definite increase in the spending also by the middle class. The total consumer spending in India is expected to more than double to $3.1 trillion by 2030, when compared with $1.4 trillion in 2017. The new middle class is expected to account for nearly 60%, or $1 trillion, of the $1.7 trillion increase anticipated in India by 2030, the report has stated.
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As the economy is becoming dynamic, many Gen-Z and millennials are also aggressively pursuing to set up their own businesses – the Startups, and contribute to the growth of the Indian economy. This is evident by the fact that India today has more than 80,000 startups and over 100 unicorns, with a valuation of about 350 billion USD. The year 2021 has been a wild funding year which saw Indian Startups raising $42 Billion across 1,583 deals in the year and minting 44 Unicorns in the process. This young brigade is pushing investment in real estate. Many of them are looking for luxury residential units in the range from Rs. 80 lakh to 1.50 crore. This transformation is also expected to contribute towards growth of 12-15% CAGR in the next five years in realty sector.
With the revision in tax benefits, the aspirant investors in real estate, who generally have a bracket of income which falls in the bracket of 30% tax-slab and also need to pay an additional tax as cess, would certainly open-up to boost the real-estate and in-turn the economy. Though there is an evident intensity to invest in real-estate, ironically, the current tax structure is not providing much relief to home-buyers, when compared with amount of home-loans taken by the buyers. Under the tax-laws, the repayment of principal amount in a home-loan qualifies for deduction under section 80C, which has an upper limit of Rs 1.50 lakh per annum. Since the same section 80C accounts a number of other investments including PF, PPF and life insurance policies etc., it becomes impossible for a buyer to take advantage of any benefit out of this section.
Further, there are many buyers who want to own bigger flats and are looking to sell their existing properties. These buyers are also reluctant due to stringent capital-gains tax. Gains from the sale of real estate held for more than two years are subject to a long-term capital-gains tax of 20%. The long-term capital-gains tax rationalization that results from the sale of property should be set at least at 10%. Additionally, it is expected from the budget that the holding time for property should be lowered from the current 24 to 36 months to 12 months in order to qualify it as a long-term capital asset.
Such measures would certainly give much desired boom to the economy. The real estate sector has immense potential to boost the infrastructure and also exponentially support employment creation at all levels too. It needs hand-holding by the government by revisiting the existing tax-structures for home buyers. When we are looking the realty sector to contribute 13% to India’s GDP in the next 5 years and contribute significantly in the nation building, the realty sector is expecting favourable considerations in the tax-structure, particularly keeping in view the increasing property prices due to increase in land prices and input costs.
(By Pankaj Bansal, Director, M3M India)