I spent most of the D-day digesting the budget document. So in the spirit of helping the readers who missed something (being preoccupied), here’s a list of the 10 major, cannot-be-ignored budget announcements of 2016 for real estate and their implications on Indian real estate.
- Exemption of REITs and InvITs from Dividend Distribution Tax (DDT) - This will help to make REITs financially more viable and allow monetisation of operational assets and enable increased participation of retail investors in real estate. Having said that, another clause that caught my eye, where the budget states a 10% tax on gross amount of dividends to be paid by recipients including individuals, HUFs and firms receiving dividend in excess of INR 10 Lacs per annum. Now, whether this is applicable to REITs is something we still need clarity on.
- Initiative for Land Records Digitisation – I would say, it looks to be a game changer in the long term and utmost crucial for improving overall transparency in the system and investor confidence. The Government has revamped the National Land Record Modernisation Programme under the Digital India Initiative in the name of ‘Integrated Land Information Management System’. This will now be implemented under Central sector scheme with effect from 1st April, 2016 and a sum of INR 150 crores is allocated for the same.
- Incentives for affordable housing - Service tax exemption on construction of affordable homes up to 60 square meters, coupled with 100% deduction of profits of an undertaking constructing flats up to 30 square meters in four metro cities and 60 square meters in other cities will further incentivise affordable housing construction in Tier I, II and III cities. However, 100% deduction of profits is for the projects approved from June 2016 to March 2019, subject to completion within three years. With projects getting delayed invariably, I like the idea of linking this proposed deduction to completion timelines, because it not only incentivises the developers, but also fixes accountability for timely completion in order to enjoy tax benefits. However, there is a catch again, Minimum Alternate Tax (MAT) will be applicable to such undertakings
- Extension of sunset date till 31.3.2020 on deduction for units established in SEZ - Sounds sensible as it will encourage more manufacturing companies to set up their units in Special Economic Zones. This will subsequently create demand for these zones and promote developers to invest in these zones.
- Incentive for developers - The exemption is now available to ready mix concrete in addition to the concrete mix manufactured at site. This will stimulate the use of ready mix concrete and will bring down the overall construction cost for developers.
What's in it for the buyers? The budget seems to provide some small incentives to end users as well which are listed below.
- Additional Interest deduction of INR 50,000 per annum for loans up to INR 35 lakh for houses not exceeding INR 50 lakhs in value - This looks nice to end-users prima facie but again the catch is that the provision will be available to only first time home buyers. Moreover, with higher pricing points in the major cities look like the majority of the beneficiaries of this deduction will be from Tier II and III cities as the exemption is available only if the house value does not exceed INR 50 lakh.
- Enhancement of current limit of deduction of INR 24,000 to INR 60,000 per annum under Section 80 GG for people not entitled to HRA by employers - Sounds like good news for the wide population staying in rental houses. It could be the first step towards encouraging rental housing.
- Deduction of interest payable on capital borrowed for acquisition or construction of a self-occupied house property allowed if such acquisition or construction is completed within five years - This is a small step towards protection of the home buyers who have long been marred with reduction in tax benefits in case of prolonged delay in delivery of the real estate projects. Earlier tax benefits were reduced significantly to individual buyers if construction did not complete within three years.
- Provision of standard deduction of 30% against the amount received on account of unrealised rent while computing the house property income - Currently, any unrealisable portion of the rent would not be included in the actual rent received/receivable while computing the gross annual value and standard deduction is not applied on it. Post Budget announcement, the standard deduction of 30% against the amount received on account of unrealised rent will be included while computing the house property income. A small change indeed!
- To rationalise the capital gain tax the budget proposes to take the date of agreement fixing the amount of consideration for calculating capital gain tax on the transfer of immovable property - Earlier, date of registration used to be considered for the purposes of computing capital gains in case of transfer of immovable property. Again very small change!!
In addition, there were various allocations, like every year, for various real estate related scheme including INR 7,296 crores for Urban Rejuvenation Mission (AMRUT and Mission for Development of 100 Smart Cities), INR 10,000 crores for Metro Projects across various cities, INR 1,448 crores for National Industrial Corridors, INR 20,075 crores for Pradhan Mantri Awas Yojna (PMAY) and INR 5,411 crores to Ministry of Housing And Urban Poverty.
This was the share of pie that the real estate had from the Budget this year! However, the industry must wait for more on key issues like single window clearance, Real Estate Regulation Bill, MAT in SEZs etc.
About the author
Surabhi Arora, leads the research team in India and has more than 13 years of experience in carrying out multi-disciplinary research and analysis in the area of finance and real estate industry. Surabhi specialises in real estate economics, policies, commercial and residential real estate research with in-depth knowledge of market dynamics across major markets in India.