The Reserve Bank of India’s (RBI) upward revision in the growth forecast to -7.5 percent for fiscal 2020-21 reinforces the government’s view that the economy is in a V-shaped recovery. Undoubtedly, the economy is recuperating at a faster than anticipated pace and high-frequency economic indicators point towards GDP growth turning positive in the second half of the current financial year. At the same time, the recent new highs attained by equity markets are driven by optimism around early Q3 corporate earnings results.
While the government has made necessary and timely interventions through liquidity infusion, fiscal support and reform-driven investments, the focus has been mainly on the supply side to revive the ailing economy. It will now be critical to inject several demand-side measures to sustain the pace of the recovery and get the economy back on its feet. While we have seen a continuance of recovery in the fourth quarter which started in Q3 2020, the actual market transaction volumes continue to be lower compared to pre-COVID levels within the real estate sector.
In the residential segment, sales in 2020 have recovered to about 52 percent of the volumes seen in 2019. Net absorption in the office segment reached 81 percent of what we observed between 2016 and 2018. At the same time, there are other segments such as retail, hospitality etc. which continue to reel under tremendous pressure exacerbated by the pandemic.
As the economy continues to unlock with businesses returning to normalcy, Budget 2021 is significant as it will play a pivotal role in laying out the contours for the next phase of economic development. In this context, we believe that the following additional measures will aid in spurring consumption, investment; thus, resulting in the sustenance of a recovery led growth in the next few quarters.
While the government has already provided ‘infrastructure’ status to affordable housing, the long-standing demand of according ‘industry’ status to the overall real estate sector remains unfulfilled. The growth of real estate sector has its linkages and impact on multiple sectors and hence warrants an integrated approach for holistic and sustainable development. Since the sector has already witnessed landmark structural reforms resulting in increased transparency, accountability and efficiency, granting of ‘industry’ will further fuel investment and employment.
Extension of benefit u/s 80EEA
The extension will make it possible to avail additional Rs 150,000 interest deduction on home loans to the following:
- Existing homebuyers who have already availed home loans
- First time homebuyers to include mid segment as well
Section 80EEA provides for an additional interest deduction of Rs 150,000 on the home loan to first-time homebuyers wherein the value of the property is not exceeding Rs 45 lakh. This benefit (currently available for home loans sanctioned up to 31 March, 2020), should be extended at least for a year to continue the benefits for the first-time home buyers.
Further, the government should look at extending this benefit to mid-segment homebuyers as well by increasing the threshold limit of property value. This will provide a strong boost to affordable and mid-segment home buyers as the residential market has been showing promising signs of recovery led by these segments in the last few months. More than 50 percent of the launches are still concentrated in the sub Rs 75 lakh ticket size across the top 7 markets in India. Taking a step ahead, this benefit can also be extended to existing home loans (fulfilling the eligibility criteria) in a timebound manner to provide tax relief to homebuyers during these distressing times.
Principal repayment on home loans
A separate provision allowing deduction of principal repayment (currently forming part of 80C deduction) will provide homebuyers higher tax benefits towards the latter stage of the loan tenure. This will be a timely relief in the current scenario where several homebuyers are grappling with honouring financial commitments.
Setting off loss from house property
The Finance Bill, 2017 had introduced provisions to restrict the set-off of loss from house property against other heads of income to Rs 2 lakh during the year. The existence of this restrictive clause severely dampens the investment sentiment in the housing market owing to lower effective post-tax return. The removal of this restriction will enable the individual to claim the entire interest on his let-out property without any limit, resulting in a higher effective post-tax return on property purchase. This is expected to spur higher investments in the housing sector, at a time when developers are reeling under tremendous stress to push their inventory and generate sufficient cash flows for business sustenance.
REITs for long-term capital gains
The success of two listed REITs has opened up a new avenue for retail investors. Since REIT units are similar to listed shares, the capital gains tax treatment should be aligned by reducing the holding period from three years to one year. This will improve liquidity and help to increase retail participation. Further, a reduction in the holding period will provide REITs a level playing field with competing equity instruments.
Allow 100 percent FDI in residential projects
Presently, 100 percent FDI is allowed through the automatic route in under-construction residential projects only. The move to permit FDI in completed residential projects will aid in unlocking the capital held up in unsold inventory, thereby rescuing cash-strapped developers. This is likely to lay a foundation for institutionally owned residential housing assets in India.
Allow input tax credit to developers
The government has reduced the GST burden by rationalising the effective rate on residential housing projects. But the unavailability of Input Tax Credit (ITC) to developers has resulted in the minimal reduction in prices to the home buyers, largely offsetting the GST reduction measure. If the ITC is restored it can help developers to pass on the tax benefit to homebuyers.
Similarly, ITC should be allowed on the development of commercial real estate properties meant for leasing purposes. As per Section 17(5) of the Central Goods and Services Tax Act, the input tax credit is not allowed to be claimed on the GST payable on rental income. The disallowance of ITC has thus led to higher cost of construction, blockage of working capital and adversely impacting cash flows of developers.
The writer is Chief Economist and Executive Director-Research and REIS, JLL India.
Budget 2021, Real Estate, ITC, FDI, REITs, Property, Homebuyers, Developers,
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