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November 13, 2020

Income tax relief provided to home buyers and real estate developers

by CA Shivam Jaiswal in Income Tax

Income tax relief provided to home buyers and real estate developers

The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. The lockdown though necessary has led to a disastrous impact on the economy. With an ever-increasing corona virus cases, lockdown was considered as an only solution to flatten the curve. However, the measures which were implemented to avoid a human disaster, have in turn led to the birth of several issues such as unemployment, recession, hindrance to economic growth, financial instability and so on.

The Government of India announced a variety of measures to tackle the situation, from food security and extra funds for healthcare and for the states, to sector related incentives and tax deadline extensions. With the on going COVID -19 pandemic a lot of income tax due dates were extended. The Income Tax Return Filing Date for Financial Year 2019-2020 is extended till 31st December, 2020 for individual taxpayers. The Aadhaar-PAN Linking Deadline was also extended by the Income Tax Department till March 31, 2021. Adding to the list of reliefs granted, The Finance Minister, Nirmala Sitharaman announced relaxations in income tax rules to allow sale of primary residential units of up to Rs 2 crore value below the circle rate.

What do you mean by the Circle Rate?

Circle rate is the minimum price at which the sale or allocation of a plot, built-up house, apartment or a commercial property can take place. This rate/price is decided by local development authorities or the state government. There can be different circle rates for different localities within the same city. The purpose of setting the circle rates is to put a check on speculation of property prices as the real estate market is opaque and often does not offer a correct price index.

Relief provided by the Finance Minister

  • Finance Minister Nirmala Sitharaman announced relaxations in income tax rules to allow sale of primary residential units of up to Rs 2 crore value below the circle rate.
  • Till now, only 10% difference between the circle rate and the agreement value was allowed.
  • The government had provided relief to homebuyers during this year’s budget if the agreement value was up to 10% lower than the circle rate or market value of properties decided by the government for taxation from 5% previously.
  • To boost residential real estate sector, the differential has now been increased to 20% till June 30, 2021, for only primary sale of residential units of value up to Rs 2 crore.

How will this relief affect the nation?

This measure will reduce hardships faced by both home-buyers and developers and help in clearing the unsold inventory.

Differential above 10% between circle rates and agreement value translates into tax penalties under Section 43CA of the Income Tax Act. This has been a major stumbling block for price rationalization. This will adversely affect, especially when it comes to liquidating unsold inventory.

For homebuyers, it is a clear added financial benefit to round off the existing offers and discounts. Additionally, the consequential relief up to 20% to buyers of these units under Section 56(2)(x) of the IT Act for the said period will definitely boost demand, especially in the affordable and mid segments.

However, the Rs 2 crore-cap on property value set by the government will result in most metro cities being unable to take advantage of this move. It has consistently been pointed out by industry bodies that price points in metro cities need to be kept in mind while offering any such relaxation.

There are approximately 5.45 lakh unsold units across the top 7 cities priced up to Rs 1.5 crore, with another 49,290 units priced between Rs 1.5 crore and Rs 2.5 crore.

With the softening of prices across markets, this price difference was in excess of 10% in some cases which kept some of the home buyers at bay. While this will certainly help the real estate sector liquidate inventory as it brings more home buyers to the market, the impact will be limited as unsold inventory is highest in Mumbai and NCR markets where properties values are higher than Rs 2 crore.

The tax relief will help the buyers expedite their decision of owning a home. The market has already started picking up pace, and tax relief on the differential between circle rate and the actual price will help the buyers get additional financial help as developers are already extending lucrative offers to them.

The relaxation provided under section 43CA acts by increasing the differential threshold from 10% to 20% in circle rates and agreement value may help in some regions where the circle rates were higher than the prevailing market rate, which is not too many. In most regions, the circle rates have been lower than the prevailing market rate. However, this provision provides a scope to the developers to reduce prices. This may also open up the scope of absorbing some black money in real estate.

Additional benefit provided in Housing

  • The Finance minister also announced a Rs 18,000-crore additional outlay for the urban housing scheme to help complete real estate projects.
  • Rs 18,000 crore would be provided over and above the Budget Estimates for 2020-21 for the Prime Minister Awas Yojana (Urban) through additional allocation and extra budgetary resources.
  • This will over and above Rs 8,000 crore already provided this year. The move will help start work on 12 lakh houses as well as complete 18 lakh houses.
  • This will help bridge the housing gap in the country to a good extent and is simultaneously an excellent economic growth driver by creating more employment.

Five years after the implementation of this ambitious scheme, Pradhan Mantri Awas Yojana (Urban) has made steady progress across states. As of August 2020, a total of 1.06 crore homes had already been sanctioned in the country, of which 33% or approx. 35.18 lakh homes are completed while another 66.23 lakh units have been grounded for construction.

It is no secret that when it comes to investment, Indians have a soft spot for real estate and they will mostly invest in house rather than in a commercial property. Real estate is an emotional purchase item. Most people want to stay in their own homes, even if it is small. They feel a sense of security living in their own home. There is also a huge pressure from family members to procure a home. A single piece of land or an apartment will often comprise about 70% to 80% of the investor’s portfolio, meaning, that much of his entire savings has gone into acquiring that property. Hence, it is crucial that one should have a proper check done and know all the income tax implications and benefits before buying any property as a huge chunk of one’s savings is involved in real estate.

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