The new government is all set to present the budget. Several sectors have pinned their on this budget. The real estate sector is one such industry.
With sluggish demand, increasing cost and high unsold inventory, the sector is not doing well. To add to this, the recent NBFC liquidity crisis, has put further stress on the cash-starved sector. The government, too, is focusing on real estate to meet its objective of “Housing for all by 2022”.
In the interim budget presented on February 1, 2019, the government came out with various tax benefits such as income tax exemption on notional rent in respect of second self-occupied property, extending benefit of roll over of capital gains u/s 54 of the IT Act (up to Rs 2 crore) to two residential houses, extending the exemption period for levy of tax on notional rent on unsold inventory of real estate dealers from one year to two years. However, the industry expects much more support from the government to revive the sector.
The current and prospective buyers of house property are expecting a higher tax deduction on the payment of a principal amount of housing loan. The deduction limit u/s 80C was last increased in the first budget of this government in 2014 to Rs. 1.5 lakh. Considering the inflation index and the fact that the said limit anyway gets exhausted in other modes of investment such as PF/ FD/insurance, it is expected that deduction u/s 80C is increased to Rs 3 lakhs.
With the increase in property prices, cost of finance has gone up. It would be good if the limit of deduction of interest on self-occupied property is increased from existing Rs 2 lakh to Rs 3 lakh, with a consequential increase in the limit of amount available for set-off with other heads of income.
Currently, in a case where there is a sale of immovable property and the value of property for the purposes of stamp duty determined as per circle rates is found to be higher than the actual sales consideration, the differential amount is subjected to deemed taxation, both for the buyer and seller of property. Many a time, this could be a hurdle while selling the property.
The government has tried to address the issue by relaxing the provisions, in case the deviation in circle rates and purchase consideration is not more than 5 per cent.
However, the same does not seem to address much of the concern of property owners particularly in metro cities where the circle rates have been fixed very high, whereas fair value of property might be much lower.
In order to address this, the government may consider increasing the allowed variance from 5 per cent to 10,per cent to cover all genuine cases where the circle rate is found to be higher than the actual consideration.
The incidence of capital gain tax by owner of property on execution of development agreement has always been a matter of dispute. In order to address the issue, Section 45(5A) of the IT Act has been amended to tax such gain only in the year in which the certificate of completion is issued.
However, currently such benefit is available only to individual and HUF (Hindu Undivided Family) taxpayers. In order to remove ambiguity with respect to tax issues for companies /firms /LLPs, section 45(5A) of the IT Act may be amended to include other types of taxpayers as well.
With the objective of achieving more volatility, it is expected that the government will bring listed Real Estate Investment Trust (ReITs) in line with listed equity shares, and reduce the holding period required for categorisation of the units as long-term capital asset from 36 months to 12 months. The existing provisions of income tax law provide restrictions on carry forward of losses in case of substantial change in shareholding of the Indian company. A beneficial regime may be introduced for carry forward and set off of losses to SPVs where more than 51 per cent shareholding of such SPVs undergoes change only due to transfer of stake to ReIT.
This being the first budget of the second term of the government, it would be interesting to see how the tax sops are balanced between the sectors. However, it may be difficult for the government to bring about too many changes, as the government may like to remain firm on its goal of maintaining fiscal balance along with the objective of fueling economic growth.
Kaushik Mukherjee is a partner (tax and regulatory) and Saurabh Kedia a director at PwC India.