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How To Add Zing To Real Estate Sector

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Real estate happens to be one of the very important sectors for the overall prosperity, employment etc. in the country.  Moreover, a new government has taken a very pragmatic view of providing housing to all may be in the next eight to ten years. Under this situation it is very important that the new Finance Minister takes a pragmatic look at the Income-tax Act and think of providing certain amendments in the Income-tax Act which will act as a booster to the ailing Real Estate Sector. It is hoped that the Finance Minister will surely consider these proposals which will definitely revive the ailing real estate sector I can say with confidence that tax amendments in real estate sector can really push up the real estate sector to new heights. Recently I read in a newspaper report that one real estate company is thinking of investing Rs 3,000 crore for its development work during the financial year 2014-2015 and this investment will be coming by the real estate company out of its own accruals. 

Here are the important suggestions which I would like to offer to the Finance Minister for being considered in the forthcoming finance bill :

Higher deduction for Interest on Loan
In 2001, the finance minister raise the deduction limit for interest on housing loan from Rs 30,000 to Rs 1,50,000. The deduction for interest on housing loan was enhanced to Rs 1,50,000 for individuals and Hindu undivided families. In the last 14 years, the prices of the houses have gone up. Moreover, the overall money in the hands of individuals have also gone up and this is evident from the fact that new Real Estate Development and the investment which is made by the home buyers is also going up.

Likewise, due to the increase in the salary structure and many more millionaires and multi-millionaires coming up there is a demand for big housing. Presently the deduction available for the housing loan is just Rs. 1,50,000 per annum which means on an average a house can be purchased just of Rs 15 lakh and the deduction for interest on loan being allowed upto Rs 1,50,000 only. The government should increase the deduction for interest on housing loan to minimum of Rs  2,50,000 specially in view of rising prices. If the government expects real dynamic growth in the housing sector, in that situation the best would be to grant interest deduction for house property purchased or investment made during the financial year 2014-15 up to unlimited amount. That means for a new home buyer if the entire interest on housing loan is allowed as a tax deduction, surely the sector will boom like anything. In turn the housing Company and the bank all of them also should try to see that the interest rates are cut down and the prices of the property are controlled.      

Tax exemption for developer developing small housing Project

Presently the developer has to pay income-tax on his income whether he develops a residential house property of 1,000 sq. ft. or 10,000 sq. ft. If the government wants that the developers throughout India to construct a common man house, in that case the government through the budget should grant exemption in respect of the income of the developer specially if he constructs small houses say of 1,000 sq. ft. or maximum up to 1,500 sq. ft. It may be noted here that this type of tax deduction was permissible earlier in the past through section 80IB(10) which provided complete exemption to the developer if a housing project was taken up on minimum 1 acre of land and the houses were built up to 1,000 sq. ft. in metropolitan town or 1,500 sq. ft. in other towns of India. It is expected that in Delhi alone big housing would be made available due to the changes made in the master plan. If the government wants that in all these new housing developments only small houses should be constructed, in that situation they should bring in this type of important tax exemption for the developer and also ask the developer to cut down selling cost. Similar deduction should also be made available to the developer specially if they are coming up in new township and creating new cities with minimum of 500 acre of land. This type of dynamic approach if adopted by the Finance Minister will definitely help to solve the housing problem in the country.

Please Do Not Bring Imported Taxes 

In India, in the last one decade we have seen that imported taxes coming into mainstream. For example, we had a fringe benefit tax which was responsible for hampering the growth of the trade and industry. Hence, the government should not think of at all introducing any new direct tax. Rather the two types of education cesses should immediately go away and surcharge for higher income should also go away.
Amendment In Respect Of Capital Gain Arising From Real Estate 

If the Finance Minister were to consider certain amendments to the income-tax act with reference to the levy of capital gain on real estate transactions, then I am sure there could be unprecedented growth in the real estate sector which we have never seen in the past. For example, right now if a person were to sell his old property or a big bungalow and to save tax thereon, he would be required to buy out a new property and invest the capital gain in the new property to save income-tax. But frankly speaking, in most of the situations the fact is that the current income of the tax payer is lower now.  He is unable to meet the standard of maintaining that big property and that is the reason he is then contemplating to sell the property. Now once he sells the property and when the question comes for making payment of Capital Gains tax, he is interested to invest in the housing sector itself and is interested to buy the property but his problem is that he has got three children. He would like to buy the property out of the big property sold by him but his interest is to make investment in the four apartments or four properties one for himself and three properties for his three children so that he can make his life simple. However, the Income-tax Law provides tax exemption of capital gains but only when the investment is made in just one single residential house property only. If the Finance Minister were to make an amendment in the Income tax law whereby the investor would be permitted to invest in more than one residential house property to save Capital Gain, then I feel on the one hand this type of provision will help in solving the housing problem in the country while on the other hand the transaction will have more transparency.  

Likewise, the time period for long-term Capital Gain on selling real estate should be at par with the time period for any other asset which is sold including shares, mutual funds etc. Right now shares enjoy long-term Capital Gain status if they are sold after holding it for more than one year while the real estate enjoys the status of long term capital gain only of they are held for more than three years.  I would like to suggest the Finance Minister that on the principles of equity and justice it is recommended that the long-term Capital Gain relating to real estate should be at par with long-term Capital Gains arising from shares, mutual funds, zero coupon bonds etc. I am sure if this small little amendment is made in the Income-tax Law, in that situation there will be a fast rolling of the transactions relating to real estate and we could see unprecedented growth in this sector.
Capital Gains Relaxation for Construction Period  

Presently the income-tax law provides that investment can be made in a residential property one year before the date of sale of the property or two years after the date of sale of the property or within three years from the date of sale of the property if a person is interested to buy land and thereafter construct the house. There was no problem when this law was introduced decades ago. But the problem now a days is even if a person selling his some other assets and making investment in a new property and even making payment to the builder but if the property is not constructed within the above mentioned time period, legally Capital Gains Tax liability will arise to him because the property is not constructed or is not ready within the stipulated time. A simple amendment in the income-tax law can be made whereby the proceeds of the old property is sold if invested within the above mentioned period itself and physical payment made to the Developer but if there is delay in delivery of the possession of the house, the benefit of Capital Gains will not be lost.  This one single provision is going to solve mental stress, torture and tension to lakhs of people who are going to invest in Real Estate and find the construction not being completed by the Developer within the stipulated time period and thus he faces extra tax liability on account of long term capital gains. 
Stamp Duty Rates To Be Cut Down 

Throughout India the rate of Stamp Duty is different for real estate transactions in different states of India.  Well, If the Government really expects big boom and growth in the real estate sector and would like to have fast turn around of property buying and selling transaction, then it is right time that we bring in India the concept of stamp duty which is applicable in overseas country where half per cent or one per cent stamp duty alone is payable. Hence, if the Finance Minister by taking into confidence the other finance ministers of India were to take a proposal of cutting down the stamp duty in whole of India, it is expected that great boom will be there and the revenue realization by way of stamp duty will ultimately be even higher due to the rate cut down. As the government is seriously considering the GST implementation, hence in the same meeting this small point can be discussed by the chief ministers of India and the other Finance Ministers of India and a call taken which will be a healthy step towards the growth of Real Estate Sector.

Investment Restriction On Commercial Property   
Right now if a person sells his residential property and he is able to save tax on Capital Gain by investing in another residential property.  Similarly, if a person sell out his agricultural property, he has got the freedom to invest in another agricultural land and save his Capital Gains Tax. But unfortunately, if a person were to sell his commercial property, he does not have freedom to make reinvestment in any other commercial property or a commercial space in a Mall or a shop. Hence, the income-tax law should be amended to provide for making investment in Commercial property out of the sale of another commercial property to save tax or long term capital gains. If this small amendment is made, the Government has nothing to lose but the advantage will be that the Real Estate Sector which is very dull these days in commercial property will flourish like anything.
Wealth-tax Bbolition On Real Estate
Real estate definitely happens to be a productive asset. Hence, the restriction on imposition of wealth-tax on certain agricultural land and also on residential property in excess of one property should be done away with. Looking to the total wealth-tax collection it is suggested that the government should think of abolishing  this wealth-tax act itself.  If wealth-tax act is abolished, we can definitely see growth in purchase of residential property which will help in solving the housing problem in the country.

Utilising Backward Districts Of India For Development Of Real Estate Sector 
The Government should come out with  innovative ideas like zero tax holidays for designated backward districts of India where the real estate is being set up. The government can identity such areas where people are not interested to go and develop real estate. In these areas adopting and applying the concept of second home or week end home if they can be developed and incentive is granted to the developer, then it will be a zero income-tax zone if the real estate is put in this type of backward districts or areas of India. Similarly, to give us better boost to the real estate sector if it is even suggested that even if the investor were to make investment in these backward districts in real estate sector, there will be no enquiry  in regard to his investment. If this type of innovative vistas can come forward, then I feel that the real estate Sector will boom like anything.
Illogical Irrational Tax Provisions To Be Scrapped  

Income-tax is a tax on the income of a tax payer.  But the government should now consider how far it is logical to tax the income-tax of a tax payer specially if he has not received that income.  There are transactions when a particular real estate is sold,  the amount realized, the Capital Gains saved thereon but under the Income-tax law Capital Gains paid thereon, stamp duty paid but there are certain provisions in the Income-tax Law whereby these provisions are applicable and the tax liability arises to the Developer as well as to the investor if the price at which of the property is sold is at a lower rate than the stamp duty valuation. For example, section 56 casts a deeming provision on the investor selling his real estate that in case a real estate is sold at a price lower than the circle rate, then the difference will be treated as deemed gift and income-tax would be payable.  Likewise, there is another section 43EA in the Income-tax Act, 1961 which was introduced just last year whereby even the Developer of the Real Estate is subjected to income-tax on the basis of deeming provision.  Thus, throughout India almost every Developer and Builder is required to make payment of income-tax on the income which is not accrued to him.  Well on the principles of real income this provision is required to be deleted from the Statute Book. Similarly, the provisions of section 50C are not in tune with the principles of real income. As the Government is not aware of the black money transactions in real estate hence section 43CA, section 50C and section 56 were introduced in the Income-Tax Act, 1961.  I would like to suggest to the Honorable Finance Minister that on the one hand they should make life simple for the tax payer and therefore they should scrap out all these unrealistic and baseless provisions in the Income-tax Act which disturb the concept of real income and on the other hand to control the black money transaction the Government should just cut down heavily on stamp duty.  Once the stamp duty is cut down to a realistic manner as is happening in USA, then surely the overall money realization for the Government will be on a higher side.

MAT and Dividend Distribution Tax Must Go
If the government takes a dynamic bold view to scrap MAT i.e. Minimum Alternate Tax and also scrap Dividend Distribution Tax,  all the sectors in the trade and industry will flourish and in particular the Real Estate will flourish and it is also expected that more and more people can come up in the real estate sector. 

Dynamic Rules And Regulations For REIT 
In the last nearly  ten years plans have been drawn up by the Government to popularize and implement the concept of real estate investment trust. Well this is already a well developed concept doing business in USA and other countries of the world.  Sometimes back I met an Indian who is settled in USA and who is have 10000 residential apartments under the concept of REIT. The government should make realistic rules and regulations for framing guidelines to set up REIT.  Rather I would even suggest that small little investors if they combine together, there should be special provisions for them also to form their REIT. It is expected that if the concept of REIT is introduced, the interest rate will go down.  The rental housing sector would become more profitable and investors would be able to take up big housing projects to be given on rental basis only.

It is hoped that the honourable new Finance Minister will surely take into consideration the above mentioned pointers of amendments to be proposed in the forthcoming Finance Bill which I am confident will boost the real estate sector as never in the past. The government should also consider while considering the above mentioned proposals that if the real estate sector makes a growth due to little revenue loss also, then also advantage is that we are able to solve the big problem of the housing sector and we are also able to control black money transaction and finally help in providing employment to millions.

The author is tax & investment consultant at New Delhi for last over 40 years. He is also Director of M/s R.N. Lakhotia & Associates & The Strategy Group.