Taxation policy: Why should govt promote rental housing

Subhash Lakhotia

The undisputed fact remains that India has tremendous requirement of residential houses. The private developers as also the government are working very hard to provide more and more stock of residential real estate but still it has not been possible to achieve supply of houses for the millions in the country. Hence, for all those persons who cannot afford buying a residential house the only alternate that remains is going in for a rented house property.  However, with regard to rental housing although opportunities are manifold but the challenges are equally great. If the Government specially through fiscal measures takes care of providing some innovative fiscal measures to the owners of the residential house property who would like to give away their parcel of residential property for rental housing, then only it is possible to achieve a big rental housing availability in the country. Also the fact remains that urban population is increasing very fast specially in the last one decade. It is also a fact that more than 25 million housing units will be the shortage at the end of our Eleventh Plan and that this shortage is expected to grow from year to year mainly because of the shifting of the population base from rural area to the urban area.  The large population of the country who would require residential housing would not be able to buy such residential houses in spite of very good finance facility available from the financial institutions including the bank. But if the Government could focus its attention to promoting the rental housing in the country, then the chances are that big partners of rental housing can be made available without any financial co-operation from the Government but what is needed is some important fiscal amendments and changes in the Taxing statute. I strongly believe that if the Government is serious in tackling the problem of residential rental housing, then it should definitely ponder over important fiscal remedies and measures which are required and which alone can make the availability of rental housing for the millions in the country. In this article an attempt has been made by me to analyze and suggest some important fiscal amendments with reference to direct taxes and also certain amendments to be undertaken by the Municipal Corporations in India which will definitely help in the process of creating a large bank of rental housing.  Here are some suggested measures which if implemented by the policy makers, then surely without any hesitation I can say it will help in expanding the rental housing market in the country to such unprecedented height that it will ease out the Government work to provide houses to the millions :- 1. The Government in the first phase should clearly understand very clearly that unless and until extraordinarily incentives are provided to the investors, then surely the investors will not at all be interested to go in for venture in the form of rental housing.  It is also a known fact that the rental particularly for residential accommodation compares unfavourably with the income derived by a person from Bank Fixed Deposit Interest Income. When this happens to be the reality of the situation, the law makers will have to plan the strategy in such a manner that may not be directly but indirectly due to the concession the gross yield to all those persons who are investing in rental housing is made available almost at par with the ongoing interest rate on a Bank Fixed Deposit. Under the Bank Fixed Deposit concept investor has not to make any hassles nor problems once the investment is completed while in the rental housing day to day activities coupled with papers, coupled with the problems of tenants etc. has to be taken into consideration. Hence, the Government will have to in the first place definitely agree with this concept that the rental housing concept should be made lucrative one and only then persons with surplus money will be coming under the fold of starting a venture for rental housing.  2. The Municipal Corporations which are based in urban areas and more particularly the Municipal Corporations in urban areas with population exceeding five lakhs should have a policy decision of not charging any house tax in respect of all those properties which are constructed now and are put to rental use only. Thus, if the Municipal Corporation extends the benefit of zero house tax say for next ten years period, then surely it would provide a big incentive to the persons making investment in rental housing. However, to avoid misuse of  this provision, the Government can put a condition that the exemption in respect of municipal house tax will not apply to rental received from blood relations and sister concerns of the owner of the property.  In the Income-tax Law for the last fifty years there have been innumerable provisions which are contained in the Statute Book which provide for complete tax holiday for ten years and may be more  if it is set up in the particular area.  On the similar lines the Government should direct all the Municipal Corporations of India to exempt Corporation Tax or House Tax to be levied for next ten years specially if a residential house property is given on rent.  This provision  can be made only from retrospective effect and it can even apply only to new properties which are constructed now  so that new persons are tempted to invest in properties to be given on rent.  3. Presently for buying a house property a person can take loan from bank or other financial institution.  However, to encourage the investment in buying residential property specially for the purpose of giving it on rent, the Government should come out with a concept  note whereby interest on loan for residential housing project will be lower by 2 per cent in comparison with the interest of loan as is applicable for a residential house property used for self use.  The banking institution can have a simple rule whereby whatever is the rate of interest of the bank, the same would be charged on purchasing a property.  But that interest rate will be reduced by 2 per cent if the house property is given on rent during the financial year.  This one single concept will definitely inspire a large number of investors who are going to buy the property by taking the loan and in case this type of interest subsidy is being made available, then surely they will like to invest in residential property to be given on rent.  4. Complete tax  holiday on rental income from residential house property given on rent should be extended to all categories of tax payers of India specially if the Government wants to have a big boom in the residential rental housing sector and to face the challenge of the problem as on today.  It may be noted here that way back two three decades ago there existed a provision in the Income-tax Law whereby the sum of Rs. 300 per month per apartment was exempted from income-tax if the same apartment was fetching  rent for residential purpose.  Now due to the inflation the Government of India specially the Finance Ministry can have a re-look at the provisions contained in the Income-tax Act and now bring in a new provision whereby there is no income-tax liability on the rental income for the next ten years specially if the rental income happens to be up to Rs. 10,000 per month per apartment.  I expect that this one single change can bring in a whole change in the concept of investment in residential sector for giving away the property on rent.  We have seen in the past that various backward areas and districts in India have been developed and have been industrialized due to the policy of the Government to declare  tax free zone in such areas.  Similarly, if this concept is implemented namely of exempting the entire rental income from residential housing for a period of ten years, then unprecedented big growth will be coming up in India in rental housing sector.  5. Presently under the provisions of Capital Gains in terms of section 54 if a person sells one residential house property, he can purchase another residential house property by making investment of the Capital Gain amount and thus no Capital Gain Tax would be payable by such a person.  Likewise, there also exists a provision in terms of section 54F whereby other than residential property if you sell any other capital asset and if you invest the entire sale consideration in acquiring another residential property, then also there is no liability to payment of any Capital Gain tax.  Now both these sections can be amended so as to achieve a better result in making available more residential property for rental housing.  The simple way to organise more apartments being made available for rental housing would be to change the provisions contained in sections 54 and 54F of the Income-tax Act, 1961 and to clearly provide that to save capital gain one can invest not in just one property but in more than one residential property.  If this simple amendment is made to the provisions of the Income-tax Law, then it is expected that the parcel of residential house property definitely will increase to unprecedented level.  However, the Government  can clearly mention in  the Statute Book that in case more than one apartment or properties are purchased, then other than one property balance property should be given out on rent.  Due to enactment of a provision in the Statute Book to the above effect, it is expected that unprecedented growth will come in the residential housing sector with no efforts by the Government and with  no loss to the Government.  It is also expected that if the above amendment is made in the Statute Book under the Income-tax Law, then thrust will be there on by small apartments and housing for better profit  to the investors and making available more and more housing parcels for the rented house.  6. The stamp duty rates on registration of immovable properties should be scaled down to unprecedented low levels.  The rate of stamp duty should be maximum half per cent to one per cent in whole of India and that this should be uniform in every State of India.  If we have a glance at the growth of the Real State Sector in United States of America and in other parts of the world, we would come to the conclusion that it is the low rate of stamp duty which has been instrumental in increasing the level of investment by the investors in Real State Sector.  Hence, if the stamp duty rates are cut down, surely more and more investors would make investment in Real Estate which ultimately will result into more stock being made available of the Residential Real Estate  for the rental housing.  7. The concept of Corporate Rental Housing Companies should be encouraged by the Government.  Hence, if a partnership firm, the limited liability firm, the company, the AOP as well as the cooperative societies  are given  enthusiasm  to make investment in the rental housing, then I see in the years to come a very big inflow of residential properties being available in whole of India for the purpose of renting it out.  I remember the other day I met a friend of mine at the Investors Club Meeting who came all the way from USA.  All the members in that meeting were surprised to find that this gentleman was having more than 1000 apartments owned by him in USA which were given on rent.  If we screen the rental housing in India, we would find that hardly there would any single person in India who is renting out 1000 apartments individually on rent for residential rental purpose.  Hence, the Government should bring out a complete clear cut statute to encourage the rental housing more particularly by the corporate sector.  The Government should also encourage the setting up of new Corporate Enterprises  exclusively for rental housing.  I also see a great future of public listed companies coming up in near future with the only aim of rental housing of residential properties.  8. Strict Tenancy Rules should be implemented in the Statute Book so as to safeguard the interest not merely of the tenants but also of the landlord.  Fast Track Code should be made available so that in case there is any dispute relating to tenancy etc., the same is sorted out within a maximum period of three months only.  If this type of law is made in the country, then definitely the investors will be happy and will be tempted to come forward to make investment in the residential housing sector to be given on rent. 9. If the Government wants the Corporate Sector also to work very hard to adopt this concept of rental housing, then the Government may make a law in the Income-tax Law whereby if the employer constructs apartments and gives it on rent to its employees, in that situation there is no perquisite value attached in the hands of the employee whether the rent is being received at a market rate or at a lower rate.  Hence, changing  the concept of taxation of the perquisite with the development of the rental housing in the country some sort of arrangement can be made in the Statute Book whereby the employers are encouraged to build more and more apartments to be either given on rent to the employees or to be given on rent at a discounted rate to the employees or to be given for use to the employees without any charge but in all circumstances and in all situations there should no perquisite value attached to the value of the perquisite in respect of the apartment received by the employee from the employer.  If this specific point is taken into consideration, surely it will have large impact in increasing the parcel of rental housing. 10. The Standard Deduction under the Income-tax Act in respect of rent received presently is 30 per cent but the same due to inflation in the country should be raised to 50 per cent.  If this incentive is granted, surely I hope that a large number of investors would come forward for the purpose of making investment in rental housing.  Moreover, the deduction in respect of certain expenses like legal charges, brokerage etc. should be granted.  In the alternative, the Government may think of granting actual expenses like a businessman in respect of rental income.  If this is granted, then also large number of corporate entities  sector in particular will be able to take advantage of development activity in the sphere of rental housing for the masses.  11. Residential Land Parcel should be organized by the Government and should be offered to the developers by draw of lot and not draw of auction.  More particularly next to the new industrial areas land parcel should be developed by the Government where colonies can be developed either by the organization running the industrial unit or by private developers so that housing is not a problem specially in new industrial areas. 12. The Government should also consider the theme of developing at least ten new metropolitan towns in India with ultra modern facilities and in next one decade all these ten towns would compete in development with the existing metropolitan towns of India.  This can become a reality only if the Government has a serious vision to implement this into action.  Whenever we travel in aircraft in any part of India, we are able to see a big chunk of land parcel being available kilometers and kilometers.  Such areas should be developed with public private partnership and that the Government should not aim of making its own big profit but should aim at offering the residential land parcel to the developers and the investors on lucky draw concept and not merely on big auction  amount.  Thus, with transparency if this concept is implemented and a new vision is brought into action of developing five to ten metropolitan towns in India in next one decade, then surely our problem of providing housing units to the millions would come to an end. Finally,  what is needed is the zeal of the Government to tackle this problem on war footing basis.  It may be noted here that providing housing to the millions is definitely the responsibility and the duty of the Government.  Only the private sector can come forward to help in performing the duty of the Government.  It is the big fiscal incentive alone which will guide the millions in the country to take forward this gigantic task of providing rental housing to the millions in the country.  I am very optimistic and I feel that if great Government emphasis is there in the present set up of the Statute in the country coupled with new proposed amendments in the forthcoming Direct Tax Code, then surely we can have a wonderful development of rental housing in the country which can become a hallmark of excellence for other countries in the world.  The author is tax & investment consultant at New Delhi for last over 40 years. He is also Director of M/s R.N. Lakhotia & Associates & The Strategy Group.  He can be reached at slakhotia@satyam.net.in.