The Union Budget 2013-14 has been largely neutral as far as Real Estate industry as most of its specific demands/wishes ignored especially that of infrastructure status, allowing ECB for all segments against current affordable housing alone.
Even some of the provision that was provided in the budget is not beneficial across the board.
Additional deduction of interest of upto Rs 100000 in addition to the current Rs 1.5 lakh of deduction u/s 24 of IT Act is provided for home loan for first home from a bank or a housing finance corporation during the period 1.4.2013 to 31.3.2014 provided the loan is upto Rs 2500000, the value of the residential property is not more than Rs 40 lakh.
Tax Deduction at Source (TDS) @ 1% on transfer of immovable properties (other than agricultural land) with a value of Rs 50 lakh or more. TDS will be applicable effective Jun 1, 2013.
Service tax abatement on homes and flats with a carpet area of 2000 sft. or more or of a value of Rs 1 crore or more is reduced from 75% to 70%. However the existing exemptions from service tax for low cost housing and single residential units will continue.
Excise duty on marble increased from Rs 30 per square meter to Rs 60 per square meter.
National Housing Bank to set up the Urban Housing Fund in consultation with RBI. A budgetary allocation of Rs 2000 crore to the Fund in 2013-14.
The Rural Housing Fund (set up through the National Housing Bank) has got Rs 6000 crore for 2013-14 compared to Rs 4000 crore in 2012-13.
Plans for seven new cities have been finalised on Delhi Mumbai Industrial Corridor (DMIC) and work on two new smart industrial cities at Dholera, Gujarat and Shendra Bidkin, Maharashtra will start during 2013-14. DMIC to be provided additional funds during 2013-14 within the share of the Government of India in the overall outlay, if required.
Chennai Bengaluru Industrial Corridor to be developed.
Surcharge increased from 5% to 10% on domestic companies whose taxable income exceeds Rs 10 crore. In case of foreign companies the surcharge is increased from 2% to 5%, if the taxable income exceeds Rs 10 crore.
Surcharge on dividend distribution tax or tax on distributed income increased from 5% to 10%.
Infrastructure status should be given for development of an integrated township and group housing on area more than 10 acres involving provision of residential, educational, medical, community, commercial or institutional buildings and creation of required facilities including roads, water supply, water treatment, sanitation and sewerage systems and solid waste treatment and management systems.
Since the sunset clause for project approved u/s 80IB (10) is not extended beyond March 31, 2008 the 5 years of project deadline for completion of such eligible project as per law expires by March 31, 2013.
So Income tax deductions u/s 80IB(10) should be made available for undertakings developing housing project sanctioned after 31st March 31, 2008 as well and upto till 2015.
If need be, size of units could be reduced from 1000/1500 sft to upto 1200 sft, in line with the definition of affordable housing prescribed by the Govt.
The completion period of 5 years for projects approved after 1st April 2005 and before March 31, 2008 for benefits u/s 80IB (10) should be extended by one year from 5 years to 6 years.
In view of economic downturn and liquidity crunch faced by the developers completing the project sanctioned before March 31, 2008 by deadline date of 31st March 2013 is difficult and thus be extended by one more year.
For calculation of benefits u/s 35AD sub-section (5)(ac) & (5)(ad) the Cost of land as well as building construction cost should be made part of capital expenditure so as to incentivize developer to undertake construction of social housing .
The tax rebate under 80C of IT Act should be increase to 2 lakh from current Rs 1 lakh and out of that Rs 2 lakh, there should be exclusivity of Rs 1 lakh for payment of principal borrowed for the purchase of a residential house.
This will help in boosting housing stock. A separate limit for payment towards purchase of a house or repayment of principal on housing loan was available earlier u/s 88.
Tax deductions u/s 80CCF upto Rs 20000 for subscription/deposit in long term infrastructure bonds should be increased to Rs 1 lakh. This will help infrastructure development.
The deduction on account of interest payment available under section 24 should be made applicable from the year in which capital was borrowed as for principal u/s 80C and should be to the extent of full interest paid at least in respect of one house.
In case this is not agreed, at least the limit of Rs. 1.5 lakh should be raised to Rs. 3 lakh for owner occupied houses. Also, three years period for acquisition/completion from the year of borrowing should be dispensed with. This will provide much needed impetus to housing sector which is reeling under huge housing shortage.
Tax exemption u/s 54 for capital gain arising from sale of any capital asset as long as it is invested in acquiring on residential house should be removed and the scope be broadened by allowing the exemption as long as the entire capital gain is invested, whether in one or more houses.
Income from renting of properties is taxed at a flat rate of 10%.
Provision of rental housing on a large scale will require the services of Property Management Firms.
In order to make property management a viable activity, income of firms which are wholly engaged in maintenance / repair and other specified management services for rental housing blocks may be brought within the ambit of Section 80 IB (10)and Section 10 (23G).
High cost of houses and high property taxes lead to a low rate of return (ROR) from rental housing making renting out an un-remunerative proposition.
To improve the effective ROR from renting, it is suggested that the deduction from rental income under Section 24(a) be increased from 30% to 50%. This will promote rental housing. For women and Senior Citizen, the deduction could be 100%, keeping social requirements and empowerment of women in view.
ECBs be allowed in all spheres of housing and real estate development, as also in SEZ projects.
Deduction @ 15% in case of individual and HUFs and @ 20% in other cases out of gross rental income is very high and should be reduced to 7.5% in case of individuals and HUFs and 10% in other cases. This will also reduce the workload of the income tax department in processing the refund applications.
Govt. should consider a Dedicated Affordable Housing Fund in line with Infrastructure Fund exclusively for construction of EWS / LIG housing and lend it to developers at low rate of interest.
Banks may increase their allocation for housing from the present 3% to 5% of their incremental deposit. The additional 2% incremental allocation may be earmarked strictly for canalizing it through housing finance companies registered with NHB.
REMF approved by SEBI should be encouraged. In addition, REITs should also be encouraged and necessary guidelines finalized at the earliest. These together will boost supply of fund to housing and real estate sector and enable equity participants reap the fruits of high yielding real estate sector.
Stock to watch
Puravankara Projects, Ansal API, Godrej Properties
The addition interest deduction of Rs 1 lakh for first home loan availed during 2013-14 provided if the property value is below Rs 40 lakh and the home loan amount is upto Rs 25 lakh will boost demand for property priced upto Rs 30-32 lakh assuming a margin of 20% of property price.
Given the high land and construction cost there is hardly any product offerings in any major metros in this price bracket barring little far off place from the metros.
Since product offerings of major listed players in major metros are way higher than this segment the positive impact of this provision is largely restricted to their offerings affordable home products or products in Tier II cities.
Players such as Ansal API and Puravankara will be the major beneficiary among the listed players. On the other hand the reduction in rate of service tax abatement by 5% to 70% for flats above 2000 sft or costing Rs 1 crore will make these products much costlier as the industry players will pass on the cost to the customers.
The impact of this on the industry players will be minimal. However the increase in surcharge will pinch the industry players. Thus with no effort for addressing the funding concern of the industry as well as much needed infrastructure status or implementation of Real Estate Regulator and land acquisition act the Union Budget 2013-14 is a neutral one for the industry.