In India nothing depicts the vast disparity in the economic conditions as the access to housing. As real estate companies struggle with unprecedented inventories of apartments, the real issue is not just about demand. The real issue is that there is simply no supply of affordable housing in India. The best way to help people create wealth is to make them start off by buying their own apartments. This is the guiding principle in the US and other countries and Indian too needs to focus on that. Post the rate cuts and the additional tax benefits, there was a surge in housing demand in the period between 2001 and 2006. However, post the financial crisis and the rise in real estate prices, the demand for housing has been on a downtrend. It is from this perspective that the big push to affordable housing in budget 2016 needs to be looked at.
Benefits for housing projects and developers:
To facilitate affordable housing the budget 2016 has announced a 100% deduction for profits from an undertaking in housing projects up to 30 square metres in the four metros and 60 square metres in the other cities. Of course this will be available to projects that are completed between June 2016 and March 2019 and are intended to give a major fillip to low cost housing. In addition, any housing scheme that constructs housing units up to 60 square metres will also be eligible for complete service tax exemption. To further reduce the cost of construction, the government has extended the excise duty exemption available to on-site concrete mix to ready mix concrete (RMC) too.
For developers, the big advantage seems to be the exemption from service tax and from payment of taxes on profit. The only catch is that MAT will be applicable and had MAT been scrapped, then it would have been a real major boost to low cost housing. But surely, one can say that it is a good start.
Benefits for home buyers:
Like in the case of income taxes and corporate taxes, the government has tried to make the availability of Section 24 of the Income Tax Act more equitable. Currently, Section 24 offers an exemption of Rs.2 lakhs on the interest component of housing loan per annum. This amount is entirely exempt up to the limit. In budget 2016 the government has gone ahead and raised this limit from Rs. 2 lakh to Rs. 2.5 lakhs. But this enhanced limit is only available in case of loans up to Rs.35 lakhs and where the price of the housing unit does not exceed Rs.50 lakhs and such projects will have to be sanctioned in 2016-17.
This is likely to have two key outcomes. Firstly, it will be a boost for housing in the mid segment. This price will cover smaller housing units in the larger cities and mid-sized housing units in the smaller towns and cities. This will largely benefit persons in the middle income group who will be able to reduce their tax liability by nearly Rs.16,000 per annum. The government realizes that for the middle income groups any tax exemption is equivalent to an increase in income and directly impacts consumption in the economy.
Benefits of pass-through for REITS:
To be fair, this is not a benefit that directly accrues to the affordable housing segment but surely there is an indirect relationship. Let us understand this point. The budget 2016 has announced that any dividend declared by a real estate investment trust (REIT) will be tax free. This was essential as a REIT is a pass-through vehicle and taxing dividend distributed by them is tantamount to double taxation. This is the practice across the world and this budget has brought Indian practices on REITS in line with global practices.
How will this impact Indian real estate? Most real estate companies having land banks that can be monetized can now depend on the REITS. This will free up a lot of capital for the real estate companies and the lower cost will translate into lower costs for the home buyers. This will indirectly impact the affordable housing market too.
In a nutshell, this budget has taken some important steps to encourage affordable housing. The current government has been keen to ensure housing for all and this is the right step in that direction. Now a lot will depend on the implementation part of the game!
For more news and highlights regarding Budget 2016, click here.