Tax breaks driving demand for affordable housing in India

Published: March 8, 2019 3:26:10 AM

Extension of tax rebates, exemption of notional tax, added flexibility to deploy capital gains from property transactions and tax breaks for individual taxpayers will help in improving the demand for lower ticket size houses.

The proposal to exempt developers from paying tax on notional rent for a period of two years is evidently a relief for the cash-strapped developers.

By Manish Sheth

The $180 billion real estate sector that contributes 6-7% of the country’s GDP is betting majorly on the performance of the affordable housing segment to script the much-awaited revival. Following the government’s continuous push for the sector, the affordable housing sector, which was conferred industry status in 2017, has emerged one of the key demand-drivers for the sector.

What the government has been focusing on is the making of the conversion of such demand into actual sales smooth. As a result of that, for both homebuyers and real estate developers, the demand for affordable homes has become actionable. The recent interim budget 2019 is also in line with the government’s declared objective of housing for all as it addressed both the demand (incentives to buyers) as well as supply (incentive to developers) challenges in the sector, which is a commendable job in itself.

From the supply perspective, the extension of tax rebates for affordable housing projects (Section 80 IB-A) and exemption of notional tax on unsold inventory to two years are much-needed support to the developers in the current liquidity scenario. On the demand side, added flexibility to deploy capital gains from property transactions and tax breaks for individual taxpayers with annual taxable incomes of up to Rs 5 lakh are positive steps for the industry.

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The government has extended the timeline to avail tax deductions under section 80 IB-A by one year i.e, till March 2020. Thanks to the extension, eligible affordable housing projects approved before March 2020 can avail a deduction of an amount up to 100% of the profits derived from such projects.

Developers presently are liable to pay tax on notional rental for unsold inventory one year after the completion of the project. The proposal to exempt developers from paying tax on notional rent for a period of two years is evidently a relief for the cash-strapped developers.

Finance Bill, in section 54 of the Income Tax Act, proposes to allow a one-time benefit for deploying the capital gains of up to Rs 2 crore for the purchase/construction of two residential houses (from one house earlier). This will help in improving the demand for lower ticket size houses, as the investors may look for options to deploy capital gains in the mid-segment or affordable housing units.

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The full tax rebate to individuals having a taxable income of up to Rs 5 lakh will provide eligible taxpayers with an additional saving of Rs 12,500 per annum. This increased disposable income will help home buyers in getting an additional loan of approximately Rs 1 lakh.

However, the government’s decision to reduce the allocation to CLSS for economically weaker sections (EWS) and low income groups (LIG) by 54% to Rs 6,000 crore under PMAY-Urban has surprised many. Also, the allocation to the mid-income group (MIG) segment has been reduced by 33% to Rs 4,000 crore.

Having said that, utilisation of funds is more important. For example, Rs 6,000 crore allocation for the EWS/LIG segment can provide subsidy to over 2.2 lakh households at an average subsidy amount of Rs 2.67 lakh per loan. Further, one key omission is the proposed GST reduction on under-construction houses. Lower GST on under-construction housing units would have given a much-needed impetus to the affordable housing sector. Nevertheless, the government acknowledges the sectoral pain from the point of view of developers as well as home buyers. The measures promulgated by the government will definitely attract buyers to the affordable housing segment.

(Author is MD and CEO, JM Financial Home Loans Limited)

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