How the Union Budget’s Caring Society theme may positively influence real estate sector

The Union Budget 2020-21 was the key buzzword for expectations of Indian real estate developers sometime earlier. The whole industry was glued to the new Budget in the hope of some new measures to revitalize the sector. While some would say that it fell short on paper towards infusing more vitality into this crucial growth engine for the economy, the fact of the matter is that the Government has already come up with several sops for the ailing sector in order to give it a fresh lease of life.

The Government’s emphasis on affordable housing by lending it infrastructure status and offering interest subsidies under the PMAY (Pradhan Mantri Awas Yojana) and CLSS (Credit-Linked Subsidy Scheme) under the Housing for All by 2022 mission has gone a long way towards keeping the sector afloat. Affordable housing has kept the real estate sector steady and recovering throughout the last couple of years. More developers are now foraying into this segment which has become the preferred choice for home buyers. The Government has also reduced GST to 5% and 1% for under-construction and affordable housing units respectively while coming out with a string of measures for encouraging investments in second homes.

More recently, prior to the Union Budget of 2020-21, the Central Government has already confirmed a stress fund of Rs. 25,000 crore for enabling the completion of innumerable stalled projects in the affordable/mid-income space throughout the country. This will help developers immensely while bringing major relief to thousands of affected home buyers. The interest rates on home loans are also at their lowest levels, spurred by the RBI’s multiple cuts in repo rates. All these measures will naturally take time to manifest. In this context, experts have stated that the Caring Society theme of the recent Union Budget will help the realty sector in more ways than one.

How the real estate sector gets a major boost from the new Union Budget of 2020-21

The Union Finance Minister Nirmala Sitharaman has already stated in her Budget speech that there are three major themes for this fiscal. These are Aspirational India, emphasis on Economic Development and the creation of a Caring Society. The latter theme has actually done good for the Indian realty sector and the Government has provided major relief on the taxation front. A major positive development for Indian real estate is the announcement of the National Infrastructure Pipeline that was unveiled on the 31st of December, 2019. This will aim at development, maintenance and operation of numerous big-ticket infrastructural projects.

This will naturally open up ample opportunities for real estate developers to cash in on infrastructural growth throughout the country. Infrastructure development and cuts in taxes, as per economists, will do a lot towards boosting the economy including the real estate sector. In sync with the Housing for All mission, the Budget has proposed an extension of the additional deduction in taxes up to Rs. 1.5 lakh for interest repaid on home loans for buying an affordable housing unit (first-time buyers). The prices of these units are to be up to Rs. 45 lakh in sync with the definition provided by the Government for affordable housing. The loan has to be sanctioned prior to or on the 31st of March, 2021.

The deadline for this added tax deduction was supposed to expire on 30th March, 2020 and the extension of this sanctioning date by a year will naturally benefit the real estate sector. The extra deduction adds to the Rs. 2 lakh deduction available under Section 24 for interest repayments and takes the tally up to a whopping Rs. 3.5 lakh, something that will interest more first-time home buyers as opined by experts.

What else should you keep in mind?

To get the deduction however, tax payers have to choose the old regime of taxation as opposed to the new tax regime that comes without any exemptions/incentives. Choosing the new tax slabs with lower rates will nullify the additional tax deduction up to Rs. 1.5 lakh for buying an affordable housing unit. However, being taxed as per the previous slab will enable the buyer to avail of the same.

The Union Finance Ministry has also proposed a tax holiday for real estate developers’ profits in case they are building affordable housing projects approved by the 31st of March, 2020. The last date for seeking approvals for these affordable housing ventures has been increased to the 31st of March, 2021. This will naturally be a major boon for developers and will encourage more players to foray into this space, thereby catering to rising demand in the segment. Additionally, the Government has offered a little relief on realty transactions. Suppose one is entering into a real estate deal where the circle rate (value taken by the Stamp Valuation Authority) is higher than the sale consideration by 5% and more of the latter, then the whole difference will be taxable in the form of income in the hands of the buyer and seller.

The new proposal seeks to increase this threshold to 10% in order to make real estate transactions easier for tax payers. There will be no adjustments made where circle rates do not cross 10% of the sale consideration after this announcement. This will boost real estate transactions of this type greatly. The Finance Minister has also proposed to revamp the definition of Business Trusts for doing away with listings of Business Trust units on recognized stock exchanges. Previously, under income tax regulations, business trusts were those trusts registered in the form of REITs or Infrastructure Investment Trusts as per SEBI. These were trusts whose units had to be listed on stock exchanges based on regulations. These are trusts which embark on raising funds from investors for investing in infrastructure/real estate projects.

The new definition should massively boost all such trusts in the country which include unlisted entities and provide more funding for the sector. Another proposal seeks to tax dividend income of unit holders in a business trust in their hands. A shift has been sought from the previous DDT (dividend distribution tax) regime where these were taxed in the hands of the company to a normal system of taxation in the shareholder’s hands. Close to 6,500 infrastructure projects will receive investments including safe drinking water, housing, roads, airports, railways, warehousing, metros and logistics. This will naturally play a major role in boosting real estate markets across the country. 100 lakh crore+ will be deployed for infrastructure growth over 5 years. A National Logistics Policy is also in the offing and will boost Indian real estate tremendously.

Some much-needed good news for the sector

In another positive development for Indian real estate, the RBI (Reserve Bank of India) has kept repo rates at similar levels of 5.15%. It has also come up with a decision to extend the restructuring of project loans by one more year without asset classification downgrading in syncing with growing realty aspirations.

Industry experts have hailed this development, stating that it is a big decision that will provide immense relief to the realty sector which is facing a cash crunch. It will bail out both housing finance companies (HFCs) and real estate developers in terms of liquidity according to experts. This decision will ease out the timeline for management and maintenance of cash flows of developers who are facing liquidity issues while also helping them finish projects which are stalled/incomplete. Measures like these will also have a role to play in the revival and resurgence of Indian real estate across 2020 and 2021.