Union Budget 2016 is out. Indian real estate just got more interesting. This year’s unioin budget was expected to show focus on a project very dear to the Modi government – affordable housing for all by 2022. Sure enough, some very encouraging steps have been announced in this area. There have also been announcements to boost structured real estate investment market. Here are the details..
Experts estimate that India needs more than 50 lakh homes annually. 90% of this demand is for house that cost less than Rs.35 lakhs. The Modi government is set on making its affordable housing project a reality. In this direction, the finance minister announced some very favourable changes to encourage investors and developers in this field
Additional tax benefit to first time home buyers
If you are a first time home buyer, if you are buying a house for less than Rs.50 Lakhs and if you are taking a home loan for up to Rs.35 lakhs, then you have something to cheer about. Currently, if you live in your own house built or bought on loan, you can deduct up to Rs.2 Lakhs of interest paid in a year from your taxable salary U/S 24(b). This limit has been further increased to Rs.2.5 Lakhs a year for first time home buyers. Since we are taxed at an average of 25-35% every year on salary, this small change translates to a good amount of saving.
Exemption on profits from affordable homes
The finance minister announced 100% tax deduction on profits from affordable housing projects. For this, the size of the houses must be less than 60 square meters (approx 646 square feet) in metro cities or less than 30 square meters (approx 323 square feet) in size in others. Even after MAT, this would increase the yield from such projects by 15-20%. Tier II and Tier III cities of India should see a lot of real estate projects thanks to this positive move.
Exemption on Service tax for small homes
The government also announced an exemption from service tax on the construction of affordable houses. So for Central Government, State Governments or Private public partnership projects of houses less than 60 square meters or roughly 646 square feet, the cost of each house will be further reduced. Hopefully most of this benefit would be passed on to the buyers. Demand for small sized homes is in large cities as much as in Tier II cities. Ideally, middle and lower income groups and first time home buyers would make most out of these announcements.
EXPECTED RATE CUT
The RBI in February had held off any rate cuts till the Budget was announced.The finance minister decided to maintain Rs.25000 crore funding amount to Public sector banks. This would help in ensuring we maintain the fiscal deficit at 3.5%. The ball is now back in the RBI court. The RBI is expected to pitch in to help in this direction by announcing some rate cut soon. You are likely to see a cut of 25 basis points in the repo rate. Hopefully, the banks would try to pass on this benefit to its customers in turn, making loans that much cheaper.Signup to our Newsletter to get instant updates about interest rate cuts as they happen,
HRA – BOOST FOR RENTALS
HRA is an allowance that can be used for tax benefit if you live in a rented property. The amount eligible for deduction is dependent on city of residence, actual rent paid etc. If you are a salaried individual, you will be able to claim this deduction U/S 10(13A). On the other hand, if you are self employed, you can claim this deduction U/S 80GG. There is a slight difference in the computation of eligible amount under the two sections. More importantly, while there was no upper limit on HRA deduction for salaried individuals, there was a limit of Rs.24,000 per annum imposed on self employed and other individuals. This limit U/S 80GG has now been enhanced to Rs.60,000 per annum. While this announcement will not make a difference to salaried taxpayers, it does come as a relief to non salaried individuals who may be living in rented house.
INVESTMENT IN REAL ESTATE THROUGH REITs JUST GOT ATTRACTIVE
A Real Estate Investment Trust or REIT is like a real estate mutual fund. When individuals invest in this fund, a fund manager is appointed to create a portfolio and manage it. Depending on the type of REIT you invest in, your portfolio could have commercial, retail, residential properties or a mix of these. The actual investment in projects could be done directly by the REIT or through another entity specially created for the purpose. This is called SPV – Special purpose vehicle. The most interesting aspect of a REIT is that you can now enter into multiple real estate projects with investment as low as Rs.2 Lakhs (at the time of initial offer – IPO). What’s more, under the watchful eye of SEBI, you will have a transparent view of your portfolio and transactions. REITs are also a very convenient method to invest in real estate. You bypass most legal hassles and any direct interactions with middlemen and developers.
No Tax on dividend distributed by Real Estate Investment Trusts
Many institutions have been keen on launching REITs in India. In the past two years many regulatory roadblocks had been cleared for REITs by the government. One of the last deterrents in this direction was the dividend distribution tax or DDT. When a REIT invests through an SPV that owns the actual assets, it receives regular dividends from the SPV. So far, REIT were also under the purview of DDT. With the DDT as high as 15% it reduced the net return drastically. In the latest budget, SPVs have been exempted from paying DDT before paying out dividends to REITs. With this obstacle out of the way, in the next couple of years, we should see a large number of REIT funds launched in India. Since this form of investing gives liquidity, you should also see foreign investments pouring in.
Minimum Alternate Tax only at the time of actual transaction
For years, companies in India had been benefiting from a disparity that arises from following Indian companies Act and Indian Income tax act for reporting profits. Deductions, exemptions, depreciation could reduce the profit and in turn reduce the corporate tax payable. So while the companies were paying out dividends to investors, the taxable profit was comparatively low. To rein in this disparity, the Government introduced MAT – Minimum Alternate tax at the rate of 18.5%. Untill now, MAT was levied at the time of creation of REITs – i.e when a ‘special purpose vehicle’ transferred assets to the REIT in exchange for a number of units. Coming as a relief to all the parties involved, the Finance Minister has exempted this stage from MAT. This tax will now be levied only when there is an actual transfer of assets. This directly lowers the cost incurred. With the large regulatory issues out of the way, there should be a lot of action in the real estate investment space over the next few years. Given that you can now invest in real estate without locking a large chunk of your funds, you may be want to include 1-2 REIT funds in your portfolio. All in all, this budget has paved a path for growth in affordable homes, real estate development and supporting infrastructure. Time will tell us how much of the benefits pass on to the end consumer, but let’s gear up!
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