The real estate sector has been witnessing a slowdown for some time even before the pandemic struck the country in March 2020.
Untenable and high property prices, defaults by builders, loss of faith in under construction projects, demonetization, and Gen X preference for renting out has been touted as the reasons for this stress in the sector.
Indian real estate sector is one of the largest in the world accounting for 6.5%-7% of GDP. It is the second largest employer after agriculture in the country.
The COVID-19, resultant lockdowns and its impact on livelihoods led to a 47% yearly decline in home sales in top 7 cities, according to property consultant ANAROCK.
The fourth quarter of 2020 recorded a strong growth on account of the festival season and offers. Does this signal demand revival in 2021? Still a lot needs to be done.
The industry is expected to grow by 20% in CY 2021 on the back of pent up demand, preference for private vehicles post pandemic and the low base.
The real estate sector has high hopes from Budget 2021. Some of the steps which could provide a fillip to home sales are listed below:
1. Increase deduction for interest on home loan
Under Section 24, interest on home loans up to Rs 2 lakh is allowed as a deduction from income. The options available to the finance minister are:
(i) remove the cap of Rs. 2 lakh and make deduction available on actual interest basis, or
(ii) increase the cap to Rs 3 lakh in top 7 cities.
The average property price in top 7 cities in India is around Rs 5,599 per square feet. A 1,000 square feet house costs Rs 60 lakh on an average including stamp duty. Banks can lend maximum Rs 48 lakh on such property demanding Rs 12 lakh as down payment.
The interest on such property is more than Rs 3 lakh per annum for the first 12 years of 20 year tenure. The yearly payment of interest and principal on such a property is roughly Rs 4.5 lakh per annum through the tenor of the loan.
2. Increase deduction for principal payment on home loan
Under Section 80C, principal payment on home loans up to Rs 1.5 lakh is allowed as a deduction from income. This is clubbed with other items like investments in PPF, provident fund contributions, tax saver mutual funds, insurance premium for LIC, etc.
The options available to the finance minister are:
(i) make a separate deduction for home loan principal payment, remove it from 80C, (ii) increase the cap to Rs 3 lakh under 80C, or
(iii) introduce a new section clubbing interest and principal payments on home loans and cap it at Rs 4.5 lakh.
3. Incentive on second house
The market for a second house has dried up due to reasons mentioned above and changes in tax laws. The loss from house property from one’s second home has now been capped at Rs 2 lakh per annum.
Earlier, in case of rented or deemed rented house (2nd house), the interest was fully deductible. Further, deduction under Section 80C for the principal component is not available.
The options available to the FM are:
(i) Revert to the earlier position with respect to interest deduction on second home, or
(ii) Allow principal payment deduction also for second home.
4. Infra status
The industry has been demanding the grant of infrastructure status for a long time now. While the government has accorded this status to affordable housing projects, this should be extended to the entire real estate sector.
Infrastructure status will lead to lower credit costs, increased flow of foreign and private capital and will benefit the sector in the long term.
5. Input tax credit on leased properties
It has been a long standing demand of the real estate industry that commercial real estate developers should be allowed to set off GST paid on inputs like steel, cement and other raw materials from the tax liability on rental income. This would avoid double taxation and give a boost to the office market.
6. Accelerated depreciation for commercial real estate
The government should provide accelerated depreciation benefits to the commercial real estate industry. This will incentive the industry to expand and invest in interior areas.
To sum up, the real estate sector which has been bleeding for many years now, needs support from the finance minister for revival of its fortunes.