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Home >Budget >Budget Expectations >Home loans: Separate deduction beyond 80C for principal repayment will boost housing

The upcoming budget is likely to be one of the most challenging budgets in the history of India. At a time when tax revenues have plummeted, the government has the added responsibility of bringing the economy back on its feet and stimulate growth. The government will have to walk on a tight rope between spending and keeping the fiscal deficit in check. During such times, it is advisable to provide stimulus to sectors like infrastructure and real estate which have a multiplier effect on the economy.

The real estate sector is among the large contributors to the country’s GDP and the second-largest employers in the country. The sector drives over 200 industries right from manufacturing to services. Any incentive extended to real estate can also stimulate all the ancillary industries.

With this backdrop, we suggest measures that can serve the cause of stimulating the real estate sector and revive the nation’s economic growth while maintaining a fine balance on its finances.

■ Focused tax deduction on principal repayment of housing loans (Section 80 C)

At present, Section 80 C of the Income Tax Act does not provide for a focused benefit on housing. Taxpayers have numerous investment alternatives to choose from and the lack of exclusive tax benefit on the principal amount of home loans makes consumers indifferent towards a house purchase. A separate annual deduction of INR 150,000 for principal repayment will provide the much-needed fillip to opt for home loans, revive credit growth in banking system and provide a fillip to housing sales too.

Increasing allocation to SWAMIH fund

The liquidity situation in the NBFC sector particularly amongst the ones who were actively lending to real estate has been poor in the aftermath of IL&FS crisis and many have scaled down operations. In such a backdrop, the stressed asset fund to revive stuck residential projects has been progressing well with several sponsored projects seeing light at the end of the day after years of construction delay. The fund setup by the government has a well-developed mechanism to prevent misuse and ensure timely completion of projects with proper supervision. The government should consider increasing the size of the fund. With the increased financial support, the fund can also be encouraged to lend to wider bouquet of projects till the NBFC sector gets back on its feet.

Promoting a dedicated Public Sector Undertaking REIT (PSU – REIT) to raise capital

The public sector banks (PSBs) need capital infusion to make provisions for pandemic induced losses and the Public Sector Units (PSUs) need to incur fresh capex to support economic growth. However, given the Government’s fiscal predicament, it may not be able to provide much capital for both. In such a situation the Government can float a PSU REIT to raise the requisite capital for PSUs. As evinced in case of the two REITs listed on Indian stock exchanges, there is a huge appetite for rent yielding assets in India and similar or greater appetite can be expected for a PSU REIT.

As per Knight Frank estimates, PSUs are sitting on REIT potential of over INR 1.2 trillion based on book value of office assets of 45 listed PSUs. The actual quantum can jump multi-fold if these assets are valued on a market value basis and the office assets of unlisted PSUs are also added to this REIT. Further, as per our analysis, this money can be raised at cost lower than what these PSUs have been raising through the debt route over the past few years which works in the favour of PSUs as well. To encourage more retail participation, investments in such PSU REITs should be considered for deduction under Section 80 C of Income Tax Act.

Restoring Input tax credit on under-construction projects

The earlier government decision to cut GST rates on real estate to 5% for residential projects and 1% on affordable housing projects was a welcome move. However, the removal of input tax credit (ITC) minimized the benefits of this reduction. As the developers cannot claim tax credits for GST paid on input items, this amount gets added to the construction cost and leads to higher apartment price for homebuyers. Further, it also negates the purpose of GST which was to remove cascading impact of taxes. The Government can use this budget session to assuage this concern and assure for restoration of ITC in upcoming GST council meet.

Credit Linked Subsidy Scheme (CLSS)

  • Extending CLSS deadline

The credit linked subsidy scheme (CLSS) has ensured a remarkable increase in the activity level in the affordable housing sector. However, the scheme will end on 31st March 2021. Given the COVID-19 pandemic disturbances and a likely two-year time frame for the economy to recover from the impact, the deadline for the CLSS scheme should be extended up to 31st March 2023.

Increasing the subsidy amount under the CLSS scheme

The CLSS scheme has done a commendable job of increasing the stakeholder interest in creating affordable housing stock in the country. The credit subsidy amount here is calculated based on defined variables of household income, interest subsidy percentage, maximum loan tenure, eligible loan amount and discount rate; to arrive at the subsidy amount that is paid upfront by the Government. The subsidy amount for the intended beneficiaries across the three categories of EWS/LIG, MIG I and MIG II comes to INR 267,280, INR 235,068 and INR 230,156 respectively.

Although the amount of subsidy is significant for EWS/LIG segments, in case of MIG I and MIG II, the subsidy amount as a percentage of house value remains a small factor in augmenting the house purchase decision. Further, if we consider the market dynamics, 35% of the houses sold in 2020 across the top 8 cities were in the INR 5-10 mn segment. Given the relatively higher prices in major cities, the amount of this subsidy should be increased to INR 350,000 with corresponding enhancement in income criteria which shall make the subsidy amount more significant in comparison to the house value. As seen in recent state initiatives around duty cuts, incentives of approximately 3-5% holds potential of becoming a decision maker and serves the cause of housing demand.

‘Industry status’ to real estate

Availing industry status would enable developers to raise funds at lower rates and cut down their cost of capital and augment their execution capabilities. Reducing interest burden will also help bring down the selling prices to some extent.

Infrastructure focus

Besides direct focus on real estate, another crucial area of intervention is urban mobility. On this account, the government should accelerate its initiatives on infrastructure development which will open cheaper land parcels for housing and ensure better housing affordability.

Rental housing

To meet the urban housing requirements, the government should consider promoting the development of an institutional rental market by providing market creation incentives. The proposed model tenancy law is a step in the right direction. While progress on the draft guidelines is expected, the government also needs to align with changing consumption patterns as trends like co-living are already gaining ground. On an individual basis, higher House Rent Allowance (HRA) or related benefits can be extended to such rental housing avenues to help consumers opt for it along with the associated tax benefits. On an institutional basis, fiscal measures like tax breaks/tax holidays to rental housing, will give a fillip to this segment before it become a widely accepted organised market model.

Real Estate Investment Trust (REIT)

The government can further push the REIT agenda by reducing the timelines of investment from three years to one year for long-term capital gains taxation; thereby ensuring larger retail investor participation.

Shishir Baijal, Chairman and Managing Director, Knight Frank India

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