Union Budget 2023- 24: Some Useful Recommendations For The Real Estate Sector

The real estate sector is among the large contributors to country's GDP and the second largest employer in the country. The sector drives over 200 industries right from manufacturing to services and any incentive extended to real estate can also stimulate all the ancillary industries. While the residential real estate market has bounced back in 2022 on the back of the ongoing resurgence in demand, further measures should be taken in the Budget to sustain the demand momentum.

1) Improving homebuyer affordability

Recommendation 1:

Focused tax deduction on principal repayment of housing loans (Section 80 C)

Justification:

At present, Section 80 C of the Income Tax Act does not provide for a focused benefit on housing which is the largest and most important expense item for most taxpayers during their lifetimes. Even investors have numerous investment alternatives to choose from and the lack of exclusive tax benefit on the principal amount of home loans makes them indifferent towards a house purchase. A separate annual deduction of INR 150,000 for principal repayment will improve housing affordability and provide the much-needed fillip to opt for home loans.

Recommendation 2:

Hiking home loan deduction limit under section 24

Justification:

Section 24 currently allows for a deduction of INR 2 lakh on housing loan interest. This needs to be extended to INR 5 lakh to boost affordability and housing sales.

Recommendation 3:

Relaxation of capital gains criteria to support homebuyers and improve affordability

Justification:

Under section 54 of the Income Tax Act, long-term capital gains from sales of existing house can be utilized in buying or constructing a new property. If the investment for exemption is done through an under- construction property, it can be claimed only if the construction of the property is completed within three years of sale of the earlier house.

Residential projects are continuously increasing in scale in terms of number of units, height and amenities which causes them to have completion timelines in excess of three years. Also, while the implementation of RERA has caused an improvement, the completion timelines of under-construction projects frequently exceed deadlines. This causes significant hinderances to homebuyers in setting-off capital gains in under-construction properties. To mitigate this, we recommend that the completion timeline of under-construction properties be extended to five years instead of the existing three.

2) Improving financial viability of affordable housing projects.

Affordable housing project registration deadline to avail tax holiday under section 80IBA has lapsed. Reintroduction of the section 80IBA registration timeline

Justification:

The 100% tax holiday for affordable housing projects under Section 80IBA, was available for projects which are approved till March 31, 2022. This section allowed developers to claim 100% tax exemption on profits subject to several qualification criteria including the approval deadline. Since this is arguably the most materially meaningful measure to boost the viability of affordable housing projects, we believe it is important to revive this measure once again.

3) 100% exemption for rental income upto INR 3 lakh for houses up to INR 50 lakh

Justification:

This will encourage individuals to invest in the affordable housing segment which suffers a massive housing shortage. Given the low rent yields, owners of such houses avoid letting it out. This measure will directly incentivize such owners to rent out their houses to the targeted segment, augmenting the efforts to increase housing stock in this segment.

(The author, Shishir Baijal is the Chairman & Managing Director, Knight Frank India)