The grant of infrastructure status to low-cost housing in the Union Budget 2017-18 will help the sector with lower interest rates and tax breaks for the developers and builders, Moody’s Investor Service said on Monday. The rating agency said the granting of infrastructure status to affordable housing is the biggest and the most impactful policy directive for the real estate sector.
“Such action will allow developers to borrow at lower interest rates and provide tax exemptions to the construction industry that has witnessed a reduction in launches and sales these last few years,” Moody’s said in a statement.
Earlier last week, Finance Minister Arun Jaitley Jaitley brought affordable housing under the ambit of the infrastructure sector, extending benefits to those investing in building low cost homes and thus making this segment eligible for various government incentives and attractive for foreign investors. This would extend the sops to the segment of the public not already covered under the Prime Minister’s housing scheme.
However, Moody’s said the positive impact will be muted in the luxury and mid-tier segments of the market.
Real estate firms will also benefit from the one-year exemption on notional rental income from unsold inventory, Moody’s said, adding that effectively, this means that they will receive tax relief, given the reduction in sales post demonetisation.
The government’s measures reducing the capital gains tax liability will also help the secondary real estate market and “a more liquid secondary market will in turn benefit the primary market”, Moody’s said.
Jaitley proposed to reduce the holding period for capital gains on immovable property, land and buildings to qualify as a long-term investment to two years from three years, making more money available at the hands of investors to put into other financial securities. At the same time, the budget sought to change the base year for the calculation of capital gains with indexation benefits to 2001 from 1981.
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“These steps will reduce the capital tax burden on property sellers, thereby spurring the secondary real estate market. This result may in turn increase investor activity in the residential market,” Moody’s said.
However, the agency said that the benefits from this measure might be offset to some extent by the negative impact from the cap on the amount of losses that can be offset against annual income. A proposal in the budget includes setting a cap on the amount of set-off losses from residential property against annual income at Rs 200,000 per annum.
Previously, all the losses from residential property including interest paid on mortgage to buy the property could be set-off against other sources of taxable income, which brought down the tax payable, the report said, adding that the move will adversely impact property demand as the tax benefit on buying a property for investment purposes comes down.