One residential house was an amendment which was introduced by the Finance Act 2014. The 2014 amendment had been causing hardship to middle class families which had to pay tax for separation of family property
There are pockets in India where due to constraint in space, a family is forced to divide its property. Rising property prices also restrict most families from buying an additional home. The typical resolution is to sell the existing residential unit and buy two or more in a distant suburb so that the family needs for space is resolved.
The Income Tax Act provides a specific exemption from the capital gains arising on transfer of a residential house, if the gains are invested in buying one residential house in India. One residential house was an amendment which was introduced by the Finance Act 2014. Prior to the, there were judicial pronouncements which held that if two or more houses are purchased adjacent to each other with common area and appurtenant to each other, then it may still be considered a residential house.
However, separation of family envisages that there shall be more than one residential house which will be acquired. The 2014 amendment had been causing hardship to middle class families which had to pay tax for separation of family property. The Budget proposal in Budget 2019 now gives relief to middle class families provided the gains arising from transfer of existing residential house does not exceed Rs 2 crore and the tax payer invests the same in purchasing or constructing two residential houses in India. This benefit can be availed by the taxpayer only once. This is certainly a welcome move for large community of middle class families who have been struggling with the undue tax cost on separation of houses.
Further, when an individual owns more than one house and those houses are self-occupied, the individual is still supposed to pay tax on the notional rent for the additional houses. It means that the Act presumed that only one house can be used by the individual for self.
The finance minister in his Budget speech did mention that often, an individual may need to own more than one house for self. Considering the hardship of such an individual to pay tax on a notional rental, it is proposed that up to two houses owned by an individual, there shall be no notional rental subject to tax. If an individual owns more than two houses, then, the notional rental for the additional houses beyond two, only shall be taxable. This is a big relief for the house owner.
On the other hand, the Interim Budget has also provided relief to the real estate developer who use to own certain unsold stock in projects which had received completion certificate. This was mainly due to poor market condition. The current tax law provided that if such stock was held for more than one year, then the notional rent on such unsold stock was to be offered to tax. The period of one year has now been proposed to be extended to two years thereby giving an impetus to the real estate developers.
The current government has been actively promoting the housing sector for the lower and middle class population. In Finance Act 2016, there was a specific exemption from taxable income, inserted for the profits or gains arising from specified housing projects subject to fulfilment of certain conditions.
The conditions pointed out that projects qualifying for the said exemption can be categorized under low cost or affordable category. Such exemption was for projects approved by the concerned authorities on or before 31 March 2019. The said period has now been proposed to be extended by one more year in the interim Budget, resulting in similar projects enjoying tax benefits approved till 31 March 2020. This is also a big relief for the community of developers engaged in qualified projects and for creating more homes for the low cost or middle class segment.
To conclude, it is evident that the real estate sector needed some fiscal benefit to survive in today’s times. The above proposed benefits certainly provides respite to both real estate owners and developers.The author is partner, Deloitte India