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Budget expectations for real estate sector stronger steps required for revival!  |  January 12, 2018

Suresh Castellino

2017 was certainly a year of change. Implementation of RERA, GST and other Policy directives did create a buzz and affected different stakeholders differently. In my opinion, Budget 2017 termed as a populous budget by many, did not have the required push for the Real Estate Sector. Yes, the Affordable Segment was a huge beneficiary, with being granted Infrastructure status, along with other incentives, such as lower interest rate for loans up to INR 12 lakh, area being increased and an increased time for construction. But is this enough to kick-start the Real Estate Sector which is currently reeling with problems ranging from large unsold inventory, high land costs, compressed margins, a high cost of capital, long approval processes and a whole lot of other issues?


Welcome to 2018 &ndash stronger steps required for revival!


While certain initiatives in 2017 have been a welcome change, there are small steps compared to leaps and bounds that may be required to support the real estate sector, which is one of the larger employment generators and a major contributor to the India GDP. A few initiatives would be critical to benefit the sector in the short term and would hasten its revival, which is urgently required to help the overall economy. A ten-point wish list has been listed below:


Industry status


While the affordable segment has been granted infrastructure status, the other segments have been in a way ignored in the previous budget. The growth of real estate sector has a positive impact on a whole lot of other industries, many of which are directly or indirectly dependent on the sector for survival. It would be great if this pending request gets some attention in this budget.


Lower rate of interest on home loans


Loans up to INR 12 lakh have been given a boost with a reduced rate of interest. While this is a step in the right direction, the quantum of INR 12 lakh should be increased substantially, to benefit a larger class of people. Rates of interest on housing loans need a further reduction of minimum 200 basis points, to increase demand. Even with this reduction, the Rate of Interest would be higher than most other developed economies.


Reduction in income tax slabs


Budget 2017 has helped create a notional surplus (disposable income) with the income tax rate on income between INR 2.5 lacs and INR 5 lacs being reduced to 5%. However, Budget 2017 also reduced the rebate under Section 87A to INR 2,500 from INR 5,000 and removed the rebate for taxpayers with income above INR 3.5 lacs. This extremely minor tax saving would have a very limited impetus on the real estate sector with piles of unsold inventory. A further tweak to cover a larger percentage of the population, would have a more positive impact and would bridge the demand-supply gap, which is much required.


Capital for land investments in the affordable segment


Land acquisition is one of the single highest cost contributors to a real estate project. Land investments must be made upfront by the real estate developer. Since margins in affordable housing are thin, it becomes increasingly difficult for affordable housing developers to buy land at prevailing cost of capital. The Government should make land available at a cheaper cost of capital to promote the affordable housing sector


Single window clearance/smoother approval process


The real estate Sector is known to be a high-risk sector due to the time taken and uncertainity regarding project approvals. The 6 &ndash 9 months and sometimes longer, taken to bring approvals, cause project delays, directly impact the Project IRR and further shrink margins, more so with the current high cost of capital. Government policies should promote Single Window Clearance and Smoother Approval Process including Environmental Clearance within specified timelines.


Reduction of GST to 5%


Despite input credit being passed on to the customer, with GST @ 12%, there is a marginal increase in the overall cost impact to the consumer. This needs to be revised downwards, to benefit the consumer, leading to a further push in sales volumes.


Stamp Duty Reduction/Uniformity


Over and above the high cost of land, GST and other taxes, the end consumer also pays about 5% - 6% Stamp Duty on its purchases in a state like Maharashtra. This varies across different states as a result of which, the consumer pays an additional 18% approx. only in taxes to the government (including GST and Stamp Duty). The government must look at reducing this cost and rationalising and uniforming stamp duty rates across the country. The taxes and stamp duty are a major hindrance to development today.


Reduction of LTCG Holding Period for REIT’s


There is a need to reduce the holding period for REIT investors. REIT’s have more of an equity flavour and should enjoy similar benefits of an equity investment. The current 3-year period needs to be re-looked at in order to be on par with equity.


Increase in cap on interest and principle deductions


Most of the taxpayers lose out on the deduction of interest paid on under-construction properties since this is allowed to be claimed in five years from the year of completion of the property. This deduction for the pre-construction interest amount is currently included in the overall limit of INR 2 lakh. In case this is allowed in the year of payment or a separate limit, many homeowners could benefit from the same.


Restriction on loss from house property


Finance Act 2017 has restricted the loss from house property to INR 2 lakh, which could be set off against any other income. House property loss in excess of INR 2 lakh has to be carried forward and adjusted against the rental income of the following years (up to 8 years). Earlier, for leased out properties, a borrower could deduct the entire interest paid on the home loan, after adjusting the rental income. According to the proposed change, the borrower can claim a maximum deduction of up to INR 2 lakh, after adjusting rental income. With high property prices and at current rates of interest on home loans, this limit should be increased, so as to allow tax payers to set off a higher amount of loss from house property against other income.  This will help increase the demand for investment in a second house property as an income-yielding asset.


Lastly, Section 80EE of the Income Tax Act provided an additional deduction of INR50,000 for first time home buyers, whose housing loan was sanctioned during the period April 1, 2016 to March 31, 2017. This benefit should be extended to first time home buyers for loans sanctioned beyond 31 March 2017 as well.


(The author is Executive National Director of Capital Markets & Investment Services at Colliers International India.)