Budget 2020 Effect on Real Estate

In previous Budget, the government has announced an additional deduction of Rs 1.50 lakh on home loan interest component for units priced up to Rs 45 lakh. This was over and above the Rs 2 lakh deduction offered under Section 24 of the Income Tax Act. This benefit, which was earlier available on loans borrowed till 2020, has now been extended till March 2021.

Do note here that the Budget has also extended the tax holiday it offered to developers of affordable projects by a year. “In order to boost the supply of affordable houses in the country, a tax holiday is provided on the profits earned by developers of affordable housing projects approved by March 2020. To promote the affordable housing projects, I propose to extend the date of approval of affordable housing projects for availing this tax holiday by one more year.

Change in capital gains treatment

“If the consideration value is less than the circle rate by more than 5 % , the difference is counted as income both, in the hands of the purchaser and seller. In order to minimize hardship in real estate transaction and provide relief to the sector, I propose to increase the limit to 10 %,” Sitharaman said.

Support to affordable housing extended in Budget 2020

In the Budget 2019, the government had introduced tax benefit for affordable home buyers under section 80EEA, for deduction up to Rs 1.5 lakhs against interest payment. However, the deadline was March 31, 2020. In the Budget 2020, the FM has announced an extension of the benefit under section 80EEA till March 31, 2021.

“The Union Budget 2020-21 continued the government’s focus on the affordable housing sector, by extending the permitted additional deduction of up to Rs 1.5 lakhs for interest paid on loans borrowed for the purchase of an affordable house valued up to Rs 45 lakhs, by one year, i.e., up to March 31, 2021. Thus, the total tax deduction available on such interest paid stays at Rs 3.5 lakhs for one more year, which is expected to positively impact demand in the affordable housing segment. Moreover, segmental supply is also expected to be favorably impacted by the one-year extension in the tax holiday currently available to developers of affordable housing.

For salaried employees, if one opts for the new scheme, one will not be able to avail of the major benefits like House Rent Allowance (HRA), Standard Deduction or Leave Travel Assistance (LTA). For salaried and self-employed people, deductions under Section 80C, with respect to home loan repayments, in addition to various other eligible items, will also not be available. The tax payer will also have to forgo the benefit of deduction under Section 24(b), with respect to the interest on home loans, for self-occupied property, deduction with respect to savings bank interest, premiums paid for health insurance for family, as well as parents, etc.

Moreover, a tax payer will not be able to claim carry forward of the losses incurred under the head ‘Income from house property’, which arises in case the loss under this head is more than Rs 2 lakhs for the current year, as loss up to Rs 2 lakhs can only be set off against the current income. Such a situation can arise, when the tax payer either has a let-out property or a self-occupied and let-out property, both financed through home loan. The loss not so set off during the current year is allowed to be carried forward for eight subsequent years. The right to carry forward the loss is akin to a tax credit that is available to you, which can be adjusted against future tax liability.

The cumulative benefit for moving toward the new tax regime is around Rs 75,000, for a person having an income of Rs 15 lakhs. As various combinations and permutations are possible, of exemptions and deductions one can claim and will have to forgo, a general statement cannot be made, on whether the existing regime is better than the alternative offered, or vice-versa. However, looking at the tax benefits one will have to forgo, generally, the benefit of staying with the existing regime, will outweigh the benefit of migrating to the new regime.

A person who has a home loan, will be better off remaining under the existing schemes under different tax slabs. As it will not make any sense for a majority of the tax payers to migrate to the new scheme, it will not affect the decision of buying a home with a home loan. Moreover, people generally do not base all their financial decisions, only on the basis of availability of tax benefits. People do not buy a house to avail of the tax benefits on home loans but buy their residential house for their needs. The tax benefits on home loans accruing to the tax payers are incidental and not the deciding factor for buying a house. Likewise, people take houses on rent for staying therein and not for availing of the HRA benefits.

In my opinion, as the new tax regime will almost be a non-starter, it will not affect decisions of taking houses on rent or buying one with a home loan. Consequently, this proposal will not have any impact on the real estate industry. People will continue to buy houses, whether the tax benefits are available or not.

Here are some of the top announcements made in Budget 2020-21 that can bring tax relief for home buyers and developers of affordable housing as well

1. The tax holiday for projects under the affordable housing category available under Section 80IBA which was available for the projects which are approved by March 31, 2020 will be available even for the projects which are approved till March 31, 2021.

2. The threshold limit for applying the provision to tax the difference as capital gains or income from other sources in case the stated consideration is lower than the stamp duty valuation, has been increased from the existing 5% to 10%. This will help the home buyer where the actual consideration is lower but the stamp duty valuation continues to be high in cases where the difference does not exceed 10% instead of the existing threshold limit of 5%.

3. For the purpose of computing the capital gains the tax payers have the option to take the fair market value of the land and building as on April 1, 2001. There were no restrictions earlier on how much the same varied from stamp duty valuations. Now, the budget proposes that the same cannot in any case, be higher than the stamp duty valuation.

4. The additional benefit of Rs 1.5 lakh of interest available under Section 80EEA introduced last year, was applicable in case the home loan was sanctioned between  April 1, 2019 to March 31, 2020. Now, Budget 2020 announced that the same will be available for home buyers who get their home loan sanctioned between April 1, 2020 and March 31, 2021.

5. The budget also proposes a different concessional tax rate regime for individuals who do not avail various tax benefits. The tax benefit listed include HRA and interest on home loan, deduction under Section 80C which includes home loan repayment. Due to these benefits being made optional, the proposed tax regime would most likely be a non-starter, and have no major impact in terms of encouraging people to invest in homes, in my opinion.

(The author is a tax and investment expert, with 5 years’ experience)

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