Proposals related to Income Tax:

1.100% deduction for profits from a affordable housing project –

100% deduction of profits of an undertaking from a housing project is proposed to be given on fulfillment of following conditions:

i) project is approved during June 2016 to March 2019;

ii) project is completed within three years of approval;

iii) project is on a plot admeasuring not less than 1000 sq. metres and 2000 sq. metres in the four metro cities and other cities respectively and

iv) flats in the project are up to 30 sq meters in four metro cities and 60sqmeters in other cities;

v) where residential unit is allotted to an individual, no such unit shall be allotted to him or any member of his family, etc

The biggest challenge in the affordable home sector is supply of affordable homes, demand for which makes for almost 90% of demand for homes. Budget proposal will address the issue of supply. This tax break will make projects of tire II & III cities viable and at the same time affordable for home buyers. However impact of this tax-break on four metros is yet to be assessed as developing a project of only 30 sq meters flats may be difficult.

This proposal will give a major boost to housing sector in tire II& III cities. Better IRR would attract more investors and raising funds from banks as well as domestic & foreign funds would be easier. 

On an average it takes 6 to 12 months to plan a project and get necessary approvals and hence if State and Central Governments offer single window clearance for these projects, real success of this proposal would be achieved.

It is important to note that this tax break is for new projects approved during said period. It needs to be clarified, if a project consists of flats of 30sq meter or 60 sq meter as the case may be and higher size also,whether pro-rata benefit would be given or not.

2. Deduction for additional interest of Rs.50000 per annum for loans up to Rs.35 Lakh sanctioned during financial year 2016-17, provided the value of the house doesn’t exceed Rs.50 Lakh.

This additional deduction has been proposed for first time home buyers. This proposal will boost demand for homes valuing up to Rs.50 Lakh. Tire-II and tire –III cities will see increase in demand due to this.

If a home buyer avails a loan of Rs.35 Lakh @ 9 % interest rate for 20 years, his first year’s interest obligation would be Rs.3.12 Lakh. He will get a deduction of Rs.2.5 Lakh and thereby he will be able to save Rs.75000 if he is in 30% tax bracket. His effective interest rate for first year will be 6.8%. So buying a home would be more attractive and easier for first time home buyers.

Home buyers of metro cities will find it difficult to get a home of Rs.50 Lakh.  Some Projects in sub-urbs and little beyond city limits may offer flats which will qualify for this tax benefit in metro cities.

3. Increase of completion period from 3 to 5 years for claiming deduction of interest for home loans.

Second proviso in clause (b) of section 24 of Income Tax Act has been proposed to be amended to 5 years from current 3 years. Now   home buyers would be able to claim deduction of interest on home loans if the property bought, or under construction, is completed within 5 yearsfrom the end of the financial year in which the loan was availed instead of the current 3 years. For home buyers who have already taken or going to take home loans by March 31, 2016, if property is not completed with 3 years from the end of the financial year in which the loan was availed, will not be able to take deduction under this section.

This amendment should have been retrospective effect as projects has been delayed and home buyers have  no control in it. They are paying rentals as well as EMI and interest wherever projects have been delayed and  on top of it, they would be denied deduction.

4. Distribution made out of income of SPV to the Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) having specified shareholding will not be subjected to Dividend Distribution Tax.

Although introduction of REITs has been under discussion for several years, no REITs have yet been formed. The dividend distribution tax (DDT) was until now chargeable at 15% for REITs.

 With the removal of DDT, REITs are likely to become a reality in India soon.  Developers would be able to unlock their investment and get a liquidity option which will boost their ability to further investment .This will also offer an opportunity to retail investors to invest in commercial property. This move will also attract foreign funds in this sector.

However industry feels, if State Government provides some support in terms of exemption/reduction of stamp duty on transfer of assets to REITs holding Company, it would further ensure success of REITs.

Proposals related to Indirect Taxes:

1. Extension of excise duty exemption, presently available to Concrete Mix manufactured at site for use in construction work at such site to Ready Mix concrete.

This will offer flexibility to buy Ready Mix concrete to developers instead of setting up concrete manufacturing plant at site. This will enhance speed of project execution.

2. Service tax exemption on construction of affordable houses up to Rs.60sq meter under any scheme of the Central or State government including PPP schemes.

This exemption is available for houses constructed under any of the schemes of the Government.  Success of this proposal is purely dependent on schemes of government. The industry expects that the Central Government and State Government launch viable and attractive schemes where private developers can participate.