RECOMMENDATIONS FOR UNION BUDGET 2023- 24

BY Realty Plus

The real estate sector’s expectations from Budget 2023 include concessions for property buyers to boost real estate sales and incentives for the sector so as to make project developments more affordable. The sector is also looking forward to infrastructure status, tax breaks, policy rationalisation and increasing the government backed funds to revive stalled projects that will revive the sector and homebuyers confidence.

FOR HOMEBUYER’S AFFORDABILITY

Focused tax deduction on principal repayment of housing loans (Section 80 C) - At present, Section 80 C of the Income Tax Act does not provide for a focused benefit on housing which is the largest and most important expense item for most taxpayers during their lifetimes. Even investors have numerous investment alternatives to choose from and the lack of exclusive tax benefit on the principal amount of home loans makes them indifferent towards a house purchase. The limit of principal deduction on housing loans under Section 80C of the Income Tax Act (IT Act) 1961 stands at INR 1.5 lakh per annum. It is recommended that this be increased to at least INR 4 lakh per annum.

Separate tax deduction section on principal repayment of housing loans - Currently, homebuyers can claim an income tax deduction on the principal repayment of their home loan. The maximum amount of deduction that can be claimed is Rs 1.5 lakh per financial year. However, various deductions for other investments such as Public Provident Fund (PPF), equity-linked savings schemes (ELSS), and life insurance premiums. There is a need to increase the limit of Rs. 1.5 lacs and separate the Housing Loan repayment benefit and to be dealt with it separately. This not only spurs housing affordability and also stimulates savings.

Hiking home loan deduction limit under section 24 - The interest deduction limit under Section 24 of the IT Act on housing loan stands at INR 2 lakh per annum, respectively, to incentivize homebuyers. We recommend that the limit of INR 2 lakh per annum be increased to at least INR 4 -5 lakh per annum to boost affordability and housing sales.

Increase in tax deduction limit on home loan interest: Currently, homebuyers can claim an income tax deduction on the interest paid on their home loan. The maximum amount of deduction that can be claimed is Rs 2 lakh per financial year for a self-occupied property. There is a need to provide financial benefits to home buyers to boost housing demand across mid and Affordable Housing and the benefit of Rs. 2 lacs could be evaluated to be increased to Rs. 5 lacs. Currently, notional rent on a second completed, non-self-occupied / let-out property is taxable. Homebuyers can save up to INR 2 lakh in taxation by offsetting their home loan interest against this notional rent. It is recommended that this tax be removed, or the INR 2 lakh limit be raised to drive capital toward the residential sector.

Relaxation of capital gains criteria - Long-term capital gains from the sale of house property are presently taxed at 20% through a special provision like Section 112 for equity shares. In addition, the period of holding of house property is currently 24 months to qualify as a Long-term Capital Asset (Section 54 of IT Act 1961). It is recommended that the tax rate be reduced from 20% and the holding period for a property be reduced from 24 months to 12 months so that there is no capital gains tax liability for the same. In addition, the cap of INR 2 crores on capital gains for reinvesting in two properties should also be removed.

Also, under section 54 of the Income Tax Act, long-term capital gains from sales of existing house can be utilized in buying or constructing a new property. If the investment for exemption is done through an under- construction property, it can be claimed only if the construction of the property is completed within three years of sale of the earlier house. In addition, as residential projects are continuously increasing in scale in terms of number of units, height and amenities, which causes them to have completion timelines in excess of three years, this causes significant hindrances to homebuyers in setting-off capital gains in under-construction properties. To mitigate this, the completion timeline of under-construction properties be extended to five years instead of the existing three.

FOR REAL ESTATE SECTOR

Reintroduction of the section 80IBA registration timeline - Affordable housing project registration deadline to avail tax holiday under section 80IBA has lapsed. The 100% tax holiday for affordable housing projects under Section 80IBA, was available for projects which are approved till March 31, 2022. This section allowed developers to claim 100% tax exemption on profits subject to several qualification criteria including the approval deadline. Since this is arguably the most materially meaningful measure to boost the viability of affordable housing projects, it is important to revive this measure once again.

Boost required for rental housing in the affordable segment - 100% exemption for rental income up to INR 3 lakh for houses up to INR 50 lakh. This will encourage individuals to invest in the affordable housing segment which suffers a massive housing shortage. Given the low rent yields, owners of such houses avoid letting it out. This measure will directly incentivize such owners to rent out their houses to the targeted segment, augmenting the efforts to increase housing stock in this segment.

While the SWAMIH fund recently got a capital infusion of INR 5,000 crore. We recommend increase in its overall size to INR 50,000 crore. As post-COVID-19, last- mile funding to stressed housing projects has become imperative to boost residential activity and consumer sentiments. Additionally, we expect the affordable housing push to be sustained and carried forward.

Increase in the affordable housing price band - There is a need to relook and increase the current price band of Rs 45 lakh for a property to be considered under affordable housing. A price band of Rs 45 lakh or below is low in a city like Mumbai, Bangalore, or Gurgaon is too low and should be increased to be made according to the city’s pricing and affordability. The limit needs a relook considering this hasn’t changed for many years and ready reckoner price, raw materials cost has increased.

Parity of Capital Gains benefits between Real Estate and Capital Markets Investment - The tax on Long Term Capital Gains accrued from the sale of a property is higher at 20%, compared to equity shares. Also, the period of holding of house property for long-term capital gains is 36 months vis-à-vis 12 months for Listed Equity Shares. There is a need to bring Taxation parity for Real Estate Investments as compared to Equity Capital Markets products.

Taxation on Interest Income from REITs/ InVITs for Foreign Investors: Foreign portfolio investors (FPIs) would expect clarity in Budget 2023 on the tax to be paid on interest income earned from investments in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). FPIs are currently taking a conservative view and have been paying a higher tax of 20% for such income. This is because the amendment in the definition of ‘securities’ in the Securities Contracts Regulation Act (SCRA) extends to the units of REITs and InvITs as well. Interest income distributed by a business trust to non-resident unit holders attracts a tax of 5% plus applicable surcharge and cess as per the Income Tax Act. The objective of introducing a specific tax regime for business trusts was supposed to boost investment in REITs and InvITs.

The External Commercial Borrowing (ECB) framework - The External Commercial Borrowing (ECB) framework, issued by the RBI under FED Master Direction No.5/2018- 19, prohibits companies availing ECB from using the proceeds for construction or development of regular housing projects and there is ambiguity regarding their usage for acquisition of land for affordable housing projects. Therefore, to further enable growth in the real estate sector, it is recommended that these relaxations be provided under the ECB framework.

Tags : Union Budget Real Estate homebuyers affordability housing loans tax