Tax Talk: New law to set India’s realty sector in order

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Published: March 22, 2016 2:35:09 AM

Real estate is the single-largest investment people make in India. The sector is largely unregulated and the worst hit are home buyers.

Real estate is the single-largest investment people make in India. The sector is largely unregulated and the worst hit are home buyers. To regulate and govern the contracts between builders and home buyers, the Rajya Sabha has cleared the Real Estate (Regulation & Development) Bill, 2016 (the Bill), which is being touted as a major reform measure to bring order in the real estate sector. Major concerns of home buyers included delayed delivery and change in project layout. So how is the buyer better off?

Builders exploiting buyer’s money: Real estate companies have been misusing home buyers money by diverting funds raised for one project to other projects, leading to delayed delivery of possession. The Bill protects the buyers by obliging the developers to deposit 70% of money collected from buyers in an escrow account to be used for the same project. Developers may face liquidity crunch in the short term, but the Bill is expected to make the reality sector more disciplined.

Transparency in projects execution: Tightening the noose on mischievous developers, to provide greater transparency in project marketing and execution, the Bill makes it mandatory for all commercial and residential projects where the land is over 500 square metre or eight apartments to be registered with the regulator. Non-registration will attract a penalty up to 10% of the project cost and repeat offence could put the developer behind the bars.

Buyer’s grievances redressed: Absence of standardisation and lack of adequate consumer protection has constrained the growth of the real estate sector. Buyers had to run to civil courts with their complaints against developers and it is a well known fact that civil courts in India take their own sweet time to pass an order. The Bill has set up a State Real Estate Regulatory Authority for each state for redressal of grievances against any builder. With a specialised regulator in place, instead of running from pillar to post, buyers can go to the regulator for faster redressal.

Penalising the mischievous builders: Builders are not afraid of delaying the possession of the house, since they do not suffer in any way. This leads to a double whammy on the home buyer, who is forced to pay rent for his housing which was promised to be provided by the builder, and also he is unable to claim tax benefit for the home loan interest, since the project remains under construction. The Bill proposes to ensure that any delay in project will oblige the developer to pay the same interest as the EMI being paid by the consumer to the bank, thereby making project delay costly for builders.

Putting an end to afterthoughts: A common practice followed by the real estate developers was to change the project layout after selling the units. Now the Bill ensures that the developer cannot make any changes to the plan that had been sold without the written consent of the buyer. This puts an end to frequent increase in the project cost. The Bill will surely renew investors’ confidence, ensure timely completion of projects and create more opportunities in the sector.

Though the first step towards a cleaner real estate sector is in place, the only hurdle is that states have to reduce the complexity of rules and move towards a transparent system. Boost to the realty sector will create jobs and also generate more revenue for states. All this will become a reality only when every state ratifies this Act and establishes a state authority on the lines set up in the law, till then home buyers are vulnerable.

The writer is Partner, Nangia & Co

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