Tax benefit builders get on affordable housing need to be given to bigger houses that now qualify under PMAY
Given how investments in the real estate sector result in a strong multiplier effect on the rest of the economy, any push for the sector is to be welcomed. To that extent, the government’s focus on affordable housing is commendable because it also benefits the less-affluent sections of society. In April, the government incentivised builders to take up such projects, allowing profits from these as a full deduction from their total income under section 80IBA of the I-T Act. Also, those buying homes for the first time and of a specific size were allowed a concessional interest rate on loans. Last week, the Credit Link Subsidy Scheme (CLSS) of the Pradhan Mantra Awas Yojana (PMAY) was tweaked to allow buyers of even slightly bigger houses to get loans at softer rates. Buyers in the first category of the middle-income group (MIG)—those with an annual income of up to Rs 12 lakh—can now buy a house of area up to 120 sq meters to be eligible for concessional loans. Those earning up to Rs 18 lakh/annum can now buy a house of area upto 150 sq metres and still avail of the concessional interest.
However, from what one infers, the tax benefits for builders remain restricted to smaller houses. Even otherwise, the increase in the area for homes will not necessarily nudge those at the higher end of the MIG into buying for several reasons. First, the discount on the interest is not really very attractive at 2-4% because there are some home finance companies offering equally attractive rates. Assuming a fairly conservative Rs 4,000 per sq ft, an apartment covering an area of 120 square metres, or roughly 1,300 sq ft, would cost at least Rs 70-80 lakh. That would not be within the means of too many people. A bigger apartment, spanning 150 sq meters, would again cost close to Rs 1crore, putting it out of reach of most. While bigger houses may be affordable in smaller towns because they are cheaper, even there, it is usually the second home that is bigger.
The CLSS really works well for homes that cost between Rs 15-25 lakh where the concessional interest makes a big difference to the total cost. In fact, even before section 80IBA was introduced in April, developers had begun to reduce the size of flats. Kotak Institutional Equities estimates the area has come down by anywhere between 20% and 40%. So, while the government may feel allowing soft loans for slightly bigger homes would give buyers more choice, in reality that may not be so. Unless builders get the tax incentive for building slightly bigger homes—right now the homes need to be either up to 60 sq metres in non-metros and up to 30 metres in the metros—it doesn’t really help too much. Most of the affordable housing construction will continue to take place in the smaller cities and towns. Given how a boost to the real estate sector will translate into benefits for the economy, a tax-break to builders for bigger homes might be worth considering. The government really has little to lose since in the absence of the incentive developers might not build at all.