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Economy Feb 21, 2013

Budget 2013: Realty wants tax benefits on housing loans, infra status

After witnessing some serious economic headwinds and sluggish demand over the last two years, a slew of policy reform over the last six months has improved overall sentiment among real estate developers. The forthcoming year brings in lots of expectations and in many ways, the upcoming Union Budget for 2013-14 will pave the way for real estate growth over 2013.

Some of the key expectations of Indian real estate sector from Union Budget 2013-14 are as follows.

Accord industry status to real estate sector

Apart from being a major driver for growth, the real estate sector in India is one of the largest employment generating sectors in the country and influences performance of allied industries like steel and cement. In spite of this, real estate sector in India does not enjoy industry status and is devoid of corresponding benefits.

Budget expectation:
Award "industry status" to real estate sector in India. This will improve funding to the sector, including lower interest rates on loans and simplify approval process and increase transparency.

Increase tax benefits on residential housing loans

Since land cost is a major component in executing low cost housing projects, the government should provide some relaxation towards utilizing ECB proceedings in acquisition of land. Reuters

An individual is entitled to claim both the interest and principal components of home loan repayments for tax benefits. However, the ceiling under tax benefits is currently capped at Rs 150,000 towards the total interest payable on the home loan and Rs 100,000 for principal paid (under Section 80 C).

The ceiling of Rs 100,000 for principal paid under Section 80 C is less, when home loan principal repayments are clubbed with other tax saving instruments.

Budget expectation:
• Principal repayments should be treated as a separate tax exemption entity and excluded from benefits under section 80 C.

• Deductions towards the total interest payable on the home loan should be doubled from existing cap of Rs 150,000 to Rs 300,000.

• The above benefits will stimulate end user demand, particularly for mid range housing and also result in tax savings for the individual which will further spur consumption.

Extend interest subvention scheme with enhanced limit on housing
Originally introduced in 2009, the scheme has been subsequently liberalised in following years. Currently, the scheme provides an interest subvention of 1% on housing loans of up to Rs 15 lakh, provided the cost of house does not exceed Rs 25 lakh. Even as interest rate regime has moderated marginally in 2012, continuation of interest rate subvention scheme is important to stimulate affordable housing demand from middle and lower income groups.

Budget expectation:
• Extend interest subvention scheme.
• Additionally, considering the high cost of housing in urban centers, the ceiling pertaining to cost of the house should be increased from current level of Rs 25 lakh.

Relax norms pertaining to External Commercial Borrowing (ECB) for low-cost housing
Corresponding to budget announcement in 2012-13, the Reserve Bank of India (RBI) has recently allowed developers and Housing Finance Companies (HFCs) to borrow from overseas through ECBs. The funds raised through such ECB could be used either for developing low-cost housing projects (excluding cost of land) or for providing loans up to Rs 25 lakh to individuals for buying units with a price tag of Rs 30 lakh or less. Affordable housing projects were defined as those where at least 60 percent of the permissible FSI would be for units having maximum carpet area.

Budget expectation:
• Since land cost is a major component in executing low-cost housing projects, the government should provide some relaxation towards utilising ECB proceedings in acquisition of land.

• Increase the existing eligibility criteria, which require cost of individual houses to be below Rs 30 lakh should be increased. This is also important considering the fact that the proposed "Land Acquisition and Rehabilitation Bill" has provisions for higher compensation and rehabilitation packages for land owners. With cost of land going up, developers will be forced to pass the additional burden on end-users, which will result in an increase in property prices.

Development of Special Residential Zones (SRZs)
The demand for low-end and mid-range residential units in major tier-1 and tier-2 cities significantly outstrips the existing and upcoming supply. However, most developers have limited their exposure to this segment owing to low profit margins and larger economies of scale.

Budget expectation:
• The government should consider extending benefits, in lines similar to Special Economic Zones (SEZs), to notified mass housing locations. Tax concessions coupled with relaxation in development norms (eg. Floor Space Index) will make development of such projects attractive and viable from developers' perspective.

• Such an initiative will also help in creating new nodes of developments in the peripherals of the city and ease existing pressures on the city's support infrastructure.

Contributed by Anshul Jain, CEO DTZ-India, a real estate consulting firm.


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