“Development became a jan andolan (people’s movement) under the present government,” declared Finance Minister Piyush Goyal during the Union Budget 2019 to much applause. It seems appropriate considering that he seemed to have touched every section of the Indian population in his proposals for the sixth interim budget.
The echoes of Goyal’s voice have not yet faded from the halls of the Lok Sabha, as he presented the budget in Arun Jaitley’s absence, but it already seems to have made some big impressions. Let’s take a look at some of the key proposals of the budget that will impact the real estate market and consumers.
A. Notional Rent
Current situation
Notional rent is the amount collected from a house that you own but don’t occupy. The current laws on income tax under Section 24 stipulate that taxes will be levied on a house that you own but don’t occupy even if the second house is lying vacant. It is required that you declare an estimated notional rent income, based on factors like location and rent of similar properties in the area, and pay tax on it.
Proposed change
The new budget has proposed changing this scenario to include another house under the umbrella of a ‘self-owned’ house. This would exempt the notional rent from a second self-occupied house from tax. Currently, the second home, even if it was occupied by the owner, is considered to be on rent and tax is levied on this notional rent.
Why this is good
“With no notional rent levied on second self-occupied homes and the capital gains up to Rs. 2 crores which can be used for buying upto 2 houses, provide much-needed impetus to the demand for homes,” says Sanjay Dutt, Managing Director and CEO, Tata Realty.
“The government has taken into consideration the challenge of unsold inventory and has therefore increased the period of exemption for notional tax on unoccupied units from the prevalent 1 year to 2 years. This will give developers a big relief allowing them to concentrate on sales strategies, points out Shishir Baijal, Chairman and Managing Director, Knight Frank India.
B. Capital Gains Tax
Current situation
Capital gains tax is the tax levied on the income obtained from the sale of property. Currently, under Section 54, a property owner can save tax on Long Term Capital Gains (LTCG) derived from the sale of property by investing it in buying or constructing a new house or by parking it in capital gains bonds.
Proposed change
The budget has proposed increasing the limit to two properties. That means an individual can continue to benefit from tax savings on LTCG if he chooses to invest in two houses instead of one. However, the individual can only do this if the proceeds from the sale of property are within Rs 2 crores. This benefit can also be exercised only once during the lifetime of the property owner and only on properties located in India.
Why this is good
“The benefit of exemption of capital gains up to Rs 2 crore for investment in two houses will increase sales in the residential sector,” predicts Surendra Hiranandani, Founder and Director, House of Hiranandani.
C. TDS for Tax Payers
Current situation
Right now, salaried individuals earning below Rs 2.5 lakhs are exempt from tax while those earning between Rs 2.5 lakhs to 5 lakhs per annum have to pay 5% income tax.
The TDS limit on rent income is currently Rs 1.80 lakh.
Proposed change
The new budget proposes that the TDS threshold on rental income be raised to Rs 2.4 lakhs and that a full tax rebate be given for individuals earning up Rs 5 lakhs. “With the additional tax rebate, an individual with total income up to Rs 5 lakhs will have no tax to be paid. This results in an assured tax benefit including up to Rs 13,000 at this level,” explains Tapati Ghose, Partner, Deloitte India to Livemint. Additionally, there is joy for individuals earning up Rs 6.5 lakhs who will be exempt from paying tax if they make appropriate tax-related investments.
Homeowners can also benefit from the proposal to increase the TDS limit on rental income to Rs 2.4 lakh.
Why it is good
“The rise in individual tax exemption up to Rs 5 lakh will impact consumer sentiments positively. The tax savings that the salaried class stand to benefit will lead to higher consumption including investments into residential real estate,” says Surendra Hiranandani.
D. Property Investment and 80C
Current situation
Home loans for property investment make up a major chunk of household expenditure for most middle-income families. The repayment of loans eats up much of their earnings leaving little room for long term investments like planning for retirement or even taking a life insurance. Alarmingly, overall household savings have shown a steep decline, from 23.6% in 2012 to about 16.3% in 2017.
Currently, under 80C individuals can obtain tax relief of only up to Rs 1.5 lakhs, which falls far below the host of additional payments that have to be made when buying a house like stamp duty, and registration fee.
Proposed change
The new budget proposes increasing the 80C deduction limit to Rs 3 lakhs to encourage middle-class households to make more long term investments in not just housing but also in other avenues to secure their financial future.
Why it is good
“A back of the envelope calculation on the new standard deduction rates and other direct tax sops give us a figure of an annual taxation exemption of almost INR 7- 9 Lakhs per annum. We believe that a fair part of the savings from this could be channelised towards real estate,” explains Shishir Baijal.
E. Affordable Housing and Section 80-IBA
Current situation
Section 80-IBA related to the goal of ‘Housing for All’ has been effective from 2017, and it stipulates that a 100% deduction of profits from the total income can be obtained by an assessee who is building or planning affordable housing projects. The key condition for claiming the profit was that the project should be approved by March 2019, and has to be completed within three years of approval.
Proposed change
The new budget proposes that the limit of project approval be extended to 31st March 2020, which is expected to make many more homes available under the affordable housing scheme and also makes the benefits of Section 80-IBA accessible to more people.
Why it is good
“The deductions announced under Section 80-IBA have been extended to projects which will be registered by March 2020-this again paves the way for new launches,” points out Sanjay Dutt.
Other Proposals that can Positively Affect Real Estate
Infrastructure
Infrastructure has received a substantial fillip in an attempt to bridge the urban-rural divide. There is extra emphasis on building rail and road connectivity that are aimed at opening up rural areas. Renovation and upgrades for 600 railway stations, completing 9,000 kilometres of National Highway and more rural road construction projects are some of the proposals outlined by Piyush Goyal.
Better connectivity means more areas opening up for housing, which can be highly beneficial for the real estate sector as well as for consumers.
Electricity
“Till the year 2014, about 2.5 crore families were forced to live the life of 18th century without electricity,” noted Piyush Goyal during the budget. Supplemented by the Saubhagya Yojana scheme, Goyal has promised that every family will get an electricity connection by March 2019. Similar to infrastructure, this can have many positive effects on housing development by making more areas inhabitable, and provide a push to the real estate market.
GST
Goyal noted that while GST has benefited small businesses and manufacturers it can be a burden on the homeowner. To mitigate the same, he has proposed the appointing of a group of ministers to recommend ways to reduce the onus of GST on homeowners. ‘The Government has referred the matter of the high incidence of GST on home buyers to the GST Council,’ Goyal said.
What are the Downsides of the Budget?
According to Anuj Puri, Chairman, ANAROCK Property Consultants, the following are some of the points that the budget has not sufficiently addressed.
- No announcements were made with regards to clearing the NBFC deadlock which continues to hold the real estate sector to ransom.
- Industry status for the real estate sector, while not really expected, was ignored again.
- There were promises of reduction on GST burden on homebuyers, but no announcement of actual relief.
- To bail itself out from the issue of job creation deficit in the country, this budget could have given a far more decisive impetus to real estate sector – one of the largest creators of jobs. Alternately, it could have created a stress-asset fund to bail out distressed homebuyers.
Overall, the Union Budget 2019 seems to have been a crowd pleaser. Arun Jaitley himself extended his compliments to Goyal “for delivering an excellent budget..(that) expands spending while pragmatically sticking to fiscal prudence. The budget is unquestionably pro-growth,” he tweeted.
It has promised assured income to farmers, pension for over 10 crore workers, and significant tax boosts in multiple ways for the middle class. Given these proposals, the overall feeling is that Goyal’s budget has ticked most relevant boxes. For now.