Budget 2020 has proposed two tax regimes. One which allows for tax benefits on housing loan and an alternative personal taxation regime, which does not allow any tax benefits on the interest and principal components of a loan under Sections 24 and 80C.
FM Nirmala Sitharaman has hinted that all exemptions may gradually be removed.
"We have provided both with the intention that in the long run, we will be gradually able to remove all exemptions and the entire framework of personal income tax will be simple. There will be a very low rate without difficulties in compliance," she told reporters after the Budget presentation.
This, say real estate experts, could have a negative impact on homebuyers’ sentiment, especially those who were contemplating availing a housing loan. It may even end up being counterproductive for the entire real estate sector which is still struggling to cope with liquidity and demand issues.
"This new regime comes at a time when government is pushing for affordable housing and has offered tax sops in the form of CLSS scheme. If there is no clarity on the government’s long-term vision, I may not go in for a house purchase at all and decide to continue staying on rent. At least rental exemptions are still intact," sayid a potential homebuyer who was hoping to buy an apartment this year.
"The non-applicability of the deduction on housing loans under the new optional individual tax structure can act as a significant deterrent for those contemplating availing housing loans. The move is likely to be counterproductive. The sector is facing a problem from the demand side. Budget has nothing in it to boost demand. Rather it potentially slows it down. From next year onwards, buyers will have to factor in the possibility of shelling out more from their monthly income if they were to buy a property if no deductions are available. Demand for affordable housing may also get hit," said Samantak Das, chief Economist & Head of Research in JLL.
Pankaj Kapoor of Liases Foras concurs.
"This will have implications both on the banking and housing sectors. Exemptions are a big motivator and if exemptions are done away with, they will have a major impact on the real estate sector," he said.
Budget 2020 has proposed to do away with the exemptions available to reduce the personal income tax burden, including one on Section 24 which offer an annual deduction of up to Rs 2 lakh on interest payments on housing loans under the new regime. This year buyers have the option to choose between the old and the new regime while filing tax returns.
Some brokerage firms rate real estate sector as 'negative'
Budget 2020 has extended tax benefits by another year (up to March 31, 2021) for development of affordable housing (for real estate developers), and provided for an additional deduction of Rs 1.5 lakh on interest component for buyers of affordable homes. The said deduction is aimed to incentivize first-time buyers to invest in residential house property, but it has not taken further steps to boost housing demand.
In fact, the budget unveiled an alternative personal taxation regime, which does not allow any tax benefits on housing. This could as well have a negative impact sentimentally on the buyer behavior, said IIFL Securities.
Motilal Oswal also rated the 'new tax regime' proposal as ‘negative’. In case an individual moves to the new tax regime, the tax exemption including deduction repayment of principal (for Rs 1.5 lakh) and deduction on interest payable on housing loan has to be forgone. The impact is likely to be negative, it said.
The non-applicability of the deduction on housing loans under the new optional individual tax structure can act as a significant deterrent for those contemplating availing housing loans, said Shubham Jain, group head and senior vice president, Corporate Ratings, ICRA Ltd.
CARE Ratings said that both the proposal to offer additional tax benefit pertaining to interest paid on affordable housing loans to the extent of Rs. 1.5 lakh which will be extended by a year to March 31, 2021 and tax holiday on profits earned by the affordable housing developers to be extended by a year to March 31, 2021 are positive.
"The said extensions announced are likely to impact the demand and supply for affordable houses positively."
But the demand for other residential segments in real estate would, however, continue to remain sluggish with no major incentives being offered.
ICICI Securities said that the Budget raises questions about the impact of doing away with the existing tax exemption of Rs 2 lakh per annum on interest paid on housing loans taken for residential house property under the new tax regime. Further, there is lack of clarity on whether one can avail the additional tax benefit under Section 80EEA for interest on affordable housing loans of Rs 1.5 lakh per annum.
"Customers may hold back home purchases until clarity emerges. While a home buyer opting for tax assessment under the existing tax regime can continue to claim both the Section 24 and 80EEA benefits, anyone opting for the new tax regime may not get any of these benefits. With the Union Government indicating its intent of moving to the new tax regime completely over the medium term, a customer looking to buy a house today may delay their purchase decision pending clarity on the new tax regime," it said.
There may be a silver lining ahead
Having said that, even if this were to happen, the real estate market will skew further in favour of end-users. With housing continuing to be one of the primary sources of social security in India, demand for affordable and mid-income housing projects will continue to sustain irrespective of these disruptions.
With the real estate sector already undergoing a consolidation in the residential space post RERA/GST implementation and the NBFC funding crisis over the last 24 months, end-users will continue to gravitate towards the affordable and mid-income housing launches of large, organised developers, said ICICI Securities in its Budget 2020 analysis.
Some realtors and real estate experts are of the view that subsidies on affordable housing are there to stay.
"While there were no demand boosters or one-time restructuring of loans loans for realtors, Budget 2020 will have a neutral impact on the sector this year," Manoj Gaur, Managing Director, Gaurs Group.
The realtors' body Credai is planning to make a representation to the government soon with regard to continuing with the exemptions and subsidies offered to the real estate sector and promoting affordable housing going forward, he said.
Dhruv Agarwala, Group CEO, Housing.com, Makaan.com & PropTiger.com, is hopeful that the government will continue to incentivise affordable housing.
"There is nothing in the Budget that shows that the government's focus will move away from the affordable segment. The narrative is that going forward it would want to move towards a more simplified tax structure. While a lot of exemptions may go away, I don’t necessarily see the exemption on affordable housing being done away with. From the demand perspective too, this is the segment where there is latent demand," he said.
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