Budget 2017-18: Affordable House And Residential Real Estate Gets a Boost

In the Union Budget 2017-18 announced earlier this month, the finance minister announced the government’s agenda to Transform, Energise and Clean India. Out of a 10 point agenda, the government has announced dedicated initiatives in the affordable housing and taxation segment towards improving the overall sentiment in real estate. Combined with the various policy initiatives announced last year, this year’s budget announcements are expected to help ease supply and also address the demand issues impacting the affordable housing sector in India. Regarding the taxation measures announced in the budget, most measures have been taken with the view to ease, and subsequently spur transaction activity in the real estate sector.

The sector cheered the announcement of according infrastructure status to affordable housing, a long pending request by the industry. This is an important step towards promoting access to priority lending thereby, spurring supply of low-cost housing units across various cities in India. Relaxation in area measurement as well as completion timelines to seek tax exemption were also welcomed. All of these initiatives are working towards boosting the residential real estate segment in the long run.

Some of the key provisions announced and their impact on real estate are:

Change from built-up to carpet area:

This move is likely to increase the livable area, thereby attracting end-users. With regards to supply, the increase in the area of the units will make it financially viable for developers to participate in the segment. With the affordable housing segment being accorded infrastructure status, developers will now be able to gain access to lower cost credit for longer tenures, which should improve the cash-flows of their projects.

Amendments made to calculation of Capital Gains tax for joint development agreements:

In an effort to reduce the upfront capital requirement for land, a majority of real estate development in recent times was carried out through joint development agreements between land owners and developers. This amendment will help towards reducing the burden for the land owners who had to pay upfront tax for joint-development agreement. A clarity on the timing of the taxation is also likely to reduce the litigations in such developments. Overall, this is expected to further encourage joint development in the real estate sector, as the discomfort of paying tax upfront without actual realization of gains is eased significantly.

Revision of Base year for Capital Gains; Long term Capital Gains Holding Period:

The base year for computation of Capital Gains tax has been revised from 1981 to 2001. This is likely to bring down the capital gains liability; especially for older properties and will allow for easier monetization of such properties. The reduction in the holding period of Long Term Capital Gains means that the exit-mechanism will also be eased. This will encourage transaction activity; which will spur investment and lead to greater formalization of the sector.

One Year relief for Notional Rental Income for Unsold Housing Units:

Earlier, developers had to pay Income Tax on unsold inventory in residential developments. In a bid to ease the pressures on developers in view of the piling unsold inventory levels, the government has decided to make amendments to this section of the Income Tax Act. Under the amended section, the notional income shall be considered as NIL for apartments completed but not sold during the financial year, in which the completion certificate has been obtained. The time period for calculation of notional rental on unsold apartments will now be one year after completion. This comes as a relief for developers who have been provided some leeway to off-load their inventory.

Overall, this year’s budget has been all encompassing and augers well for the real estate sector. Apart from the measures listed above, it pledges relief for rural India, middle class taxpayers and small and medium-sized companies. The Government is thus, taking strategic steps towards further strengthening its agenda of stimulating growth, providing respite to middle class, affordable housing, curbing black money, promoting a digital economy, transparency of political funding and simplification of tax administration.

Appeared on 18th Feb in HT Estates Delhi