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Budget 2020: Income-tax laws that impact homebuyers and builders

Some more changes in tax provisions can help energise the real estate sector.

Preeti Goel

The real estate sector has seen a slew of measures in recent budgets to give it a push by spurring demand and augmenting supply but whether the market forces have been impacted enough by these measures is a key question.

More can perhaps be done to meet the multiple challenges faced by homebuyers and real-estate developers still sitting on the fence. Some of the impediments arise from the tax and regulatory environment, lack of affordability and financing, high cost of construction and poor infrastructure and liquidity issues.

A fundamental principle of economics is that people respond to incentives. As Al Capone put it, “All I did was to supply a demand that was pretty popular.”

Let us first look at homebuyers and some of the provisions of the income-tax law that effect them. What can the government do to further incentivise the individual homebuyer.


Section 80EEA

If one was looking to buy an affordable home worth up to Rs 45 lakh for the first time, the last Budget offered a good incentive.

A tax deduction of up to Rs 1.5 lakh on interest paid on a home loan sanctioned during the Financial Year 2019-20 has been given. With an additional deduction of Rs 2 lakh under section 24(b) on interest on home loan for a self-occupied house property, the total deduction could go upto Rs. 3.5 lakh.

The interest payable for one full financial year should be Rs 3.5 lakh to avail the full benefit. The cap Rs 45-lakh cap on stamp duty value may be considered for revision as middle-class buyers in urban areas may not easily be able to buy affordable homes at prevailing high property rates. The demand for affordable housing remains untapped.

Section 24

In the Finance Act, 2019, the government allowed an interest deduction on housing loan for two (instead of one) self-occupied house properties up to Rs 2 lakh. The limit of Rs 2 lakh may be extended as the earlier limit was based on the loan taken for one house property. Since two house properties are now involved, the limit may be increased. The restriction to set-off loss from house property with other incomes may be relaxed and extended from the existing Rs 2 lakh.

Section 80C

The law gives a deduction for repayment of the principal amount for home loan taken for purchase or construction of a residential house property.

What if one wants to make additions/alterations to an existing home? The deduction does not include payments for addition, alteration, repair or renovation of a house property after its completion or occupation.

The government may consider extending the scope of the deduction to include payments for additions, alterations of residential property. This could provide impetus for an upgrade when family grows and there is scope for additions. Alternatively, the principal repayment of housing loan be separated from the overall limit of Rs 1.5 lakh under Section 80C.

Section 23

Income from house property is computed based on the annual lettable value. The annual lettable value is the potential rent fetched by the property had it been rented out. Thus, factors like standard rent, municipal value of the property or rent of similar properties come into play. When the actual rent is more than the potential rent, the actual rent is considered. But what if the actual rent is lower than the notional rent as per contract with the tenant? One may stand to lose as the higher notional rent is considered by the taxman.

An amendment that actual rent be taken into consideration and not notional rent may help homebuyers. The standard deduction and deduction for interest expenditure may also be restricted to let out property to reduce litigation on notional rent value and provide certainty to taxpayers. An appropriate anti-abuse provision to prevent artificial lowering of rental income by taking high security deposit will protect the government’s interest.

Section 54F

Gains from sale of a long-term asset (other than a residential house) are exempt if invested in purchase or construction of one residential house in India. But there is restriction here. The exemption will not apply if one owns more than one residential house, (other than the new asset) when selling the original long-term asset. The restriction may be relaxed to boost investment opportunities by allowing for owning more than one residential house (other than the new asset).

Provisions that impact builders

Section 23(5)

As it stands, the notional income from house property held as stock-in-trade for real-estate builders is taxable. A moratorium is provided as the incidence of tax arises after two years from the end of financial year in which completion certificate is issued. This creates hurdles for builders in claiming full interest deduction, since the house property loss set-off against other income is restricted to Rs 2 lakh. The government may consider giving respite by eliminating the tax.

Section 54

An exemption is available from capital gain on sale of property used for residence if the capital gains are re-invested in one residential house in India. The government could consider exempting capital gains when invested in Real Estate Investment Trusts (REIT) as well. REITs are securities linked to real estate that can be traded on stock exchanges.

Section 54EC

An exemption is also available on investment in bonds upon sale of property. Such bonds are issued by the Rural Electrification Corporation and the National Highway Authority of India and should be bought within six months of selling the property. As of now, a maximum of Rs 50 lakh can be invested in bonds. An increase in this limit could further infrastructure development.

Section 28(via)/ 2(24)(xiia)

Unsold properties of real estate builders are taxed on fair market value when they are converted into or treated as capital asset. Builders often lease unsold properties and the levy is in addition to taxing the lease rental. The basis for taxation is that the inventory stands converted from “stock in trade” to a “capital asset” once it is leased out. Instead of taxing the fair value at the time of conversion, the government may consider deferring taxation to transfer of the converted property, as currently existing for conversion of capital asset into stock-in-trade.

Section 80IBA

Affordable housing projects are given a deduction under this clause. To promote “housing for all” by 2022, the sunset date for taking approval was extended till March 31, 2020, in the Interim Budget 2019. This may be further extended.

The suggestions may well help in homing in the realty dreams of many and motivate them to cross the fence to buy or invest in real estate and give the sector a push.

(The author is a senior tax professional with EY India)
Moneycontrol Contributor
first published: Jan 27, 2020 11:09 am

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