February 2017 | Back to all Real Estate Articles
While the budget has not met all the expectations of individual tax payers, it has come to the rescue of the developers. We examine the implications of the Union Budget 2017-18 for home owners, as well as developers
No change in home loan exemptions
With skyrocketing prices of homes, in big as well as small cities, the average size of the home loan that an individual tax payer has to take, has increased substantially during the last 10 years. Consequently, the interest on such loans is significant, as compared to the limit of deduction of Rs 2 lakhs that is available to a person who uses the house for his own residence. Individual tax payers were expecting this limit to be increased, to partly compensate for the increased interest costs. Likewise, due to high loan amounts the benefit on principal repayment for home loan taken for residential purpose, which qualifies for deduction under Section 80 C along with other eligible items, largely went waste due to overcrowding of this section by various other items like life insurance premium, tuition fee, Provident Fund, etc.
Individual tax payers, hence, were expecting either a separate limit for principal repayment of home loan, or enhancement of the existing limit of Rs 1.5 lakhs. However, home buyers have been grossly disappointed on this count.
Change in holding period for long term assets
Nevertheless, the finance minister has proposed to reduce the holding period for qualifying any immovable asset as ‘long term’ from three years to two years.
A long-term capital gain is taxed at a concessional rate of tax of flat 20% and also qualifies for various exemptions under sections 54, 54 f and 54EC, where the tax payer can save his tax liability by investing in another residential house or in capital gains bonds of REC (Rural Electrification Corporation) or NHAI (National Highways Authority of India). However, this will not benefit a majority of the individual tax payers, as the average individual tax payer does not or sell homes frequently – at the most, he may buy and sell the house three or four times during his lifetime.
Change in the base year for calculating indexation benefits
The finance minister has also proposed to shift the base year for giving the tax payer the option to get the market value of the property to April 1, 2001, instead of the earlier date of April 1, 1981. This provision may give some benefit to the tax payers, as the market price of immovable property has increased more during the period, as compared to the increase in the cost inflation index announced by the government from time to time.
TDS on rental payments
Till now only the persons who are carrying on business or profession having turnover above a certain amount, were required to deduct TDS on payment of rent made. This budget has proposed that any individual or an HUF, who pay any rent above Rs 50,000 in a month, will have to deduct tax at source at the rate of 5% of the rent, either at the time of payment or credit. Under this provision, the tax payer will not have to obtain the tax deduction number. However in case the owner does not furnish his PAN number, the tenant will have to deduct tax at the rate of 20%.
Set off and carry forward of loss due to interest payment
As per the existing provisions, you can claim interest for money borrowed for buying, constructing, repairing or renovating a property, upto Rs 2 lakhs in case of self-occupied property, whereas there was not such limit in case of let out property. Normally, where the taxable rent is much lower than the interest payable on such home loans, there results in a loss in respect of the let out property, which the tax payer is entitled to set off against any other head including salary. This was used by many tax payers for reducing their tax liabilities.
The finance minister has proposed that the loss under the head ‘Income from House Property’ shall be eligible for set off against other income, only to the extent of Rs 2 lakhs and the excess shall have to be carried forward, which can only be set off against your rental income. This would result into enhanced tax liability for the tax payers, who own more than one house and have taken a home loan to finance the purchase of the property.
Infrastructure status granted to affordable housing
The finance minister has proposed that the affordable housing sector shall be given a status of ‘infrastructure’ and thus, qualify for the benefits of tax exemptions. Moreover, the infrastructure status to the affordable housing sector, will open the doors for easy funding at concessional rates of interest.
Notional rent on unsold flats
The finance minister has also proposed to tax the unsold flats of developers, which was treated as stock-in-trade of the developers. As proposed by the finance minister, the notional rent in respect of the flats which remain unsold, shall have to be offered for tax, even if the developer has not received any rent on such flats, only after one year of completion of the project. For income tax purposes, such flats shall be treated as self-occupied and as a tax payer is allowed to have only one house property as self-occupied, so, the other flats in possession of the developer will be deemed to have been let out and thus, notional rentals will become taxable. This provision will force developers to dispose of the flats quickly, so as to avoid paying tax on rent which he has not received.