Finance Minister Nirmala Sitharaman is set to present her fourth straight Union Budget on February 1, 2022. The Finance Minister will present financial statements and tax proposals for the fiscal year 2022-23 (April 2022 to March 2023) on Tuesday. Will the Union Budget favour homebuyers? Is it the right time to enter the property market? Taking cognisance of the developing trends of the sector in the wake of the COVID-19 pandemic, the financial statements and proposals of the next Union Budget 2022-23 can convince homebuyers to contemplate a purchase decision.
There is no denying that the real estate sector is embracing a tumultuous phase amid the COVID-19 pandemic. The government is keen on assisting the real estate sector with structural reforms and incentives. In order to create the case of the salaried class who is interesting in purchasing a house or flat as a place to live amid these testing times, Finance Minister Nirmala Sitharaman can raise the interest deduction for homebuyers for a tax rebate.
What should you expect?
Homebuyers can expect more purchasing power this year. As the real estate sector is going through a rough phase, the government has been bringing in structural reforms and incentives to aid the sector and support the development firms. Under the current circumstances, the government is already promoting homeownership. And subsequent lockdowns have given us enough reasons to buy spacious homes.
To boost the overall homebuying sentiment, especially in these difficult times, Finance Minister Nirmala Sitharaman may increase the interest deduction for homebuyers for tax rebate under section 24(B) in her Union Budget. Under the section, the limit on the deduction for interest payment for let out as well as self-occupied properties is Rs 2 lakh. Further, if construction is not completed within five years from the end of the financial year in which capital was borrowed, then the limit is Rs 30,000 only. The limit will likely be increased to Rs 5 lakh. It would give more interest deduction.
Moreover, first-time homebuyers were made entitled to an additional rebate of Rs 1.5 lakh over and above section 24 (B), on the interest component under section 80EEA. This provision was introduced in Union Budget 2019 for affordable homes and comes laden with many conditions. First, the loan should have been sanctioned by a bank, banking company or housing finance company between 1 April 2019 and 31 March 2022, the stamp duty value of the property should not exceed ₹45 lakh and the homebuyer should not own any residential house property on the date of sanction of loan. The government would likely extend the date, as it has done in the past.
In addition to the above, with an aim of providing ‘Housing for All’, the beneficiaries under the Pradhan Mantri Awas Yojana – Credit Linked Subsidy (EWS /LIG) Scheme would be eligible for a subsidy of up to Rs2.67 lakh on their home loan. Under CLSS – MIG, max subsidy for MIG1 – is Rs 2,35,068 and maximum subsidy for MIG2 – is Rs 2,30,156. Hence, if someone is taking a loan of Rs 10 lakh, the amount repayable for the MIG2 category would be ₹7,69,844.
Hence, first-time homebuyers will have some good savings if they invest now.
Do price points favour Homebuyers?
The real estate market is already witnessing a slump. As a result of the glut, the prices have remained under check for the past two years or more. In some markets, the rates have corrected to 2013-14 levels. Greater Noida West in the NCR is one such example of an oversupplied market, where ready-to-move-in apartments are selling at price points witnessed in 2013-14.
Compared to the ready properties, new launches are coming at lower rates in some markets. It means that development firms are already under pressure to sell. Further, for homebuyers, it means that they can bargain for heavy discounts while purchasing from a developer.
Will Affordability Increase?
Yes, as a result of the possible measures, the country will be able to increase the supply of affordable housing in the country. Development firms have been demanding a slew of measures to make the housing segments more attractive for homebuyers. One such demand is to include all housing under the ambit of affordable housing.
The scope of affordable housing projects receiving 100% deduction of the profits and gains derived from the business of development and building housing projects u/s 80 IBA of Income Tax, 1961-2018 should be increased, developers have proposed. And there has been a change in provisions of this section with effect from September 1, 2019. Housing projects are approved between 01.06.2016 to 31.03.2022. Hence, developers have demanded to amend Section 80IBA (2)(a) to provide the benefit to all the projects registered with RERA between June 1, 2015, and March 31, 2023. Moreover, developers have demanded that to promote affordable housing, the deduction should be extended to all projects registered with RERA, provided they meet other requirements.
Currently, under section 24(b), interest on borrowed capital to acquire a house for rental purposes is allowed in full. However, in the case of self-occupied houses, interest is restricted to Rs 2 lakh. According to the developers, this limit is too low and should be increased to at least Rs 5 lakh to promote house purchase.
What does this mean?
If the government increases the scope of the definition to include all other kinds of housing, developers will then be able to reduce the rates further. That said, it is only one of the recommendations from the real estate sector. Hence, do not bank your purchase decision merely on this. Go for real gains. Hopefully, the tide will turn in favour of homebuyers this year!
6 Key Expectations by Homebuyers
1. Increase the limit of Home Loan Interest Deduction
Under Section 24 of Income Tax Act, 1961, a buyer can claim deduction up to a maximum of Rs 2 lakh for interest on the loan taken for acquisition/construction of self-occupied house property. Given the rising interest and property rates, an increase in the said exemption to at least Rs 5 lakh per annum in the upcoming budget can provide the necessary boost to the residential segment, primarily within the mid or luxury segment, and premium markets such as MMR etc.
2. Separate provision for Deduction of Principal Repayment on Home Loans
A separate annual deduction of Rs 1.5 to Rs 2.0 lakh for principal repayment (other than Section 80C) could help provide an additional fillip to residential sales across India and also help homebuyers reduce their tax burden.
Extension of benefit under Section 80EEA for first-time home buyers: Additional Tax Benefit for interest on affordable housing loans
The additional tax deduction benefit of Rs 1.5 lakh for interest, which is currently available for home loans sanctioned till 31 March 2022, can be extended for a period of 2 years until 31 March 2024.
The limit of Rs 45 lakh for affordable housing is on the lower side, considering higher property prices in the metropolitan cities of Delhi, Mumbai, Bengaluru etc. As a result, the tax benefit is not being availed by many and the expectation is to revise the said limit upwards in the coming budget. A geography-wise ticket size revision could help in sustainable demand across cities within this segment and help factor in differential pricing across markets.
Some industry experts say as property prices have increased, the property price range to be classified as affordable should be increased from the current Rs 45 lakh to something in the range of Rs 60 lakh to Rs 75 lakh.
3. GST Input Tax Credit Revision
With the construction cost increasing across major housing markets in India, provisioning of input tax credit on the existing GST rates for under-construction properties shall provide some respite to the developers and end-users.
4. REITs: Reduction in Holding Period
Reduction in the holding period for REIT units from three years to one year shall help reduce capital gains tax for retail investors. This shall help in increasing retail investor participation in the REIT investment instrument and improve liquidity for developers.
5. Provide Stamp Duty Rebates Across All States
To provide homebuyers with a minor sigh of relief in Covid, many states such as Karnataka and Maharashtra reduced their stamp charges from 5% to 2% in 2021. This step led to a positive outcome as there was a rise in housing sales and at the same time, developers were able to attract small home buyers.
With intent to attract more homebuyers in the coming years, there is an expectation that the government realises the need for stamp duty rebates across all states to boost housing demand.
6. Clarity on Tax Breaks for Under-Construction Properties
In the absence of express mechanism under the I-T Act to arrive at the date of acquisition of a house property, it has been a vexed issue over the years especially for under construction properties. Reference may be drawn from judicial precedents with different interpretations on the date of acquisition of property i.e., either date of possession, property registration, date of making majority payment, etc. To simplify matters, it may be good to provide specific provisions under the Act to arrive at the date of acquisition to avoid ambiguity.
Further, a home buyer can claim an exemption for long-term capital gains if he/ she invest the capital gains/ sale proceeds of one property/ other long-term asset to buy/ construct another property within specified timelines. However, such exemption is not available if the construction is completed beyond three years.
This condition potentially penalises a home buyer for reasons beyond his control as there could be delay in construction for varied reasons. It may therefore be considered to extend this period to 5 years (similar to a deduction for interest from borrowed capital in case of constructed properties) or provide for exemption even in case construction is completed beyond 3 years, as also held in various judicial precedents.