Having witnessed a prolonged slowdown and hit had by the recent demonetization drive, the real estate sector was betting big on the Budget 2017 for revival of fortunes. It was expecting, among other things, income tax incentives for first-time home buyers apart from higher tax savings on housing loans and house insurance premiums. However, the budget not only missed out on these things, but with its proposals it is also believed to have discouraged investors from investing in second or more homes.
First, the budget has proposed to cap tax breaks on interest paid on rented homes at Rs 2 lakh a year. Earlier the entire payment of interest on a housing loan taken to buy such a house was allowed to be set off from the gross income. Secondly, the budget has made a provision that payment of house rent exceeding Rs 50,000 a month has to be accompanied by a 5 percent TDS (tax deduction at source). This means that people who could have made substantial savings in taxes earlier by investing in more than one property can’t do so now. So, what does this mean to the people who used to buy homes for investment purpose?
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Experts believe that this move will discourage speculative activity in a big way. “Speculative activity is likely to be discouraged by this move. We do not think the rental yields were so healthy that investments were made purely for rental income; it was rather for the capital value appreciation. The move, therefore, is likely to deter investor activity as the associated tax savings through deductions will no longer be available,” Santhosh Kumar, CEO – Operations & International Director, JLL India.
This, in other words, means that wealthy people who earlier used to buy property for speculative purposes will get impacted more than the middle class people buying a second house for rental income.
“The impact certainly would be more on people in the higher income bracket as people in the lesser income bracket may get benefited despite the Rs 2 lakh capping,” says Rahul Singla, Director, Mapsko Group.
Along with investors, the housing market also is likely to be negatively impacted. “Investment activity has already been quite low in the last few months. Now this is likely further discourage speculative activity,” say experts.
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Also, we are likely to see more impact on the sales of high-end luxury houses. “The segment usually saw investments and parking of excess funds and is already a little under the weather due to the impact of demonetization. The FM’s move can impact the already-sluggish activity and lead to downward pressure on the developers of premium projects. However, with end-users driving the affordable segment, we do not foresee any impact on it,” says Kumar.
Some realtors, however, say that in certain cases this move is not likely to put much pressure on the second home purchasing of buyers. For instance, an individual looking out for a second property through home loan financing purely for the purpose of investment can finalise a property in the same region where his first property is listed and at the same time he is ready to move in.
“Even if the property is located in a different region, it should have an equivalent rental value to the one currently owned by him. This will ensure that the rental value of both the the pieces of property is almost identical, allowing the buyer to shift into the newer property while still availing the tax benefits on it under the prevalent income tax norms and the older property can be put up on rent, hence avoiding the outflow of loan repayment and inflow of rental income on the same property. Thus, this move is not likely to put much pressure on the second home purchasing of the buyers,” says Deepak Kapoor, president, CREDAI-Western UP and director, Gulshan Homz.
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Also, there may be some earning couples who already own a house and might be looking for secondary property for investment purposes. “They can opt for sharing the home loan equivalently wherein both can avail the benefits of loan repayment and at the same time, the rental income would also be divided equally amongst the two, helping reduce the tax burden further. Shared ownership would also encourage lesser interest rate on behalf of the female counterpart getting additional benefits while repaying the loans,” says Ashok Gupta, CMD, Ajnara India Ltd.