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Tax incentives for home buyers written by Muthukumar K, published in The Hindu Business Line. January 1, 2017

With slowdown in the sales of residential flats over the last three years and inventory pile-up, real estate is down in the doldrums. Builders have great expectations from Budget 2017.


Ushering in of RERA (Real Estate Regulation and Development Act) Bill and demonetisation have aggravated the situation in recent months and realty players are looking for sops to revive the sector.


For starters, they are looking at broad tax-based incentives that could encourage spending on housing. While on the one hand, they are expecting lowering of tax burden, there are also expectations that the annual upper limit of Rs. 2,00,000 currently allowed as deduction from income for the interest payments on home loans made during the year will be raised to Rs. 3,00,000. Some property consultants even propose a regular increase in this limit that could be linked to the inflationary trends in the economy.


Last year, for the first time, home buyers were given an additional tax deduction of Rs. 50,000 on interest payment (in addition to Rs. 2,00,000) for house property worth up to Rs. 50 lakh and with a loan amount up to Rs. 35 lakh. Some believe it has benefited only home buyers in the tier-II and tier-III cities. At an upper limit of Rs. 50 lakh, many urban houses were ineligible for such tax limit, they feel. There is a proposal to usher in similar benefit for first-time buyers of houses in the metros &mdash with a higher limit for house value.


Clarity on GST


Further, real estate players expect the government to clear the air as regards the applicability of Goods and Services Tax (GST) rate for the sector. GST is expected to be implemented from July 1 and as per industry experts, either 12 per cent or 18 per cent would be applicable for the sector. Property builders are pitching for a lower rate of 12 per cent as they expect such rates to reduce the cost of apartments and improve affordability for property buyers.


Also, clarity is expected as regards the applicability of the abatement scheme, whereby developers and buyers get service tax benefits. Currently, in the case of buying under-construction property, an abatement of 75 per cent of the sale value of the property is allowed subject to the property value being less than Rs. 1 crore and of less than 2,000 square feet. Abatement is usually given in cases where it is difficult to separately arrive at the value of construction services (minus the value of land) on which service tax is leviable.


In such cases, the effective tax rate works out to about 3.8 per cent on the higher side, according to a property consultant. However, if the above conditions are not met, abatement is reduced to 70 per cent. And in such a case, the effective tax rate increases to 4.5 per cent. The big question that the real estate players want answered is whether such abatement would be available under the GST regime. If it is not, the effective tax rates are expected to shoot up. Moreover, the industry needs clarity on whether credit for input taxes would be allowed if the composition scheme has already been availed by the developers.


REIT tax


Also, realty players are looking for a simplified tax structure for REITs (Real Estate Investment Trusts) with removal of the multiple taxes currently applicable. While some want clarity on issues of dividend distribution tax and waiver of stamp duty, others are looking for removal of long-term capital gain taxes for sponsors of REITs.


The sector is also looking at a concrete decision on the land Bill as well as proposals to quicken the approval process by giving single-window clearance for projects. Like in the past, some builders reiterate their demand for &lsquoindustry&rsquo status for the sector which, in turn, could improve access to finance as well as reduce financing costs, while also giving them options to raise ECBs.




Broad-based tax incentives to spur spending on housing


Lower GST rate of 12 per cent


Simplified tax structure for REITs


(This article was published in the Business Line print edition dated January 23, 2017)