What are the key takeaways for real estate sector from Indian union budget 2014?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Last week in India was all about union budget. Since the new Modi Government came into power in Delhi, most political and economic commentators were looking forward to the Budget 2014. The media and and coffee shop discussions were all about speculating and making projections as to what will or not be included in Minister Arun Jaitley's maiden budget. The budget, which is expected to signal the dawn of socio-economic revival or “acche din” by Modi Government, was the most talked about event.

Railway budget 2014 was presented first, and then the general budget. While the industry has welcomed the budget presented by union finance minister Arun Jaitley, the opposition has slammed it. However, with this budget, one thing is given, that a common man will be able to save more. And these savings when circulated in the eco-system can boost investments and thereby GDP growth.

Among all the sectors, it seems, real estate sector was given maximum attention by Finance ministry. There were slew of measures to revive the sector and boost the confidence of both home buyers as well as real estate developers.

What are the key takeaways for realty sector from union budget 2014? Here we present them.

• Tax relief available for housing loan interest payment

We all know that home-ownership continues to be the lifelong dream of most middle class and lower middle class people in India. And financing this dream has become expensive due to high interest rates. While, interest rates are not the domain of Finance ministry, the ministry has increased the deductions on interest on home loan from present Rs. 1.5 Lacs to Rs. 2 Lacs. How does this help the buyer? We present the explanation below.

	If Gross Income Rs 9 Lacs		If Gross Income Rs 15 Lacs
	Before Budget	After Budget	Before Budget	After Budget
Gross Total Income	900000	900000	1500000	1500000
Less Interest Paid on Home Loan	150000	200000	150000	200000
Gross Taxable Income	750000	700000	1350000	1300000
Less Deduction under Section 80C	100000	150000	100000	150000
Total Taxable Income	650000	550000	1250000	1150000
Tax Payable	60000	40000	205000	175000
Education Cess 3%	1800	1200	6150	5250
Total Tax Payable	61800	41200	211150	180250
Savings		20600		30900

• Relaxation in FDI for real estate sector

With a view to catalyze investments in development of townships and infrastructure, 100 per cent FDI is allowed under the automatic route in townships, housing and construction development projects and hospitality sectors such as residential complexes, shopping centers, malls, multiplexes, Cineplex’s, commercial offices, hotels/service apartments, resorts, hospitals, educational institutions.

Prior to budget 2014, the FDI in real estate sector in India was subjected to certain conditions.

• Minimum area requirements, in case of

1. Development of serviced housing plots - 10 hectares.
2. Construction-development projects - built-up area of 50,000 sq. mts.
3. A combination project, any of the above two conditions will suffice.

• Investment

1. Minimum capitalization for wholly owned subsidiaries - US$ 10 million; for joint ventures with Indian partners - US$ 5 million, to be brought in within 6 months of commencement of business.
2. Original investment cannot be repatriated before a period of three years from completion of capitalization.
3. The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).

Post Budget 2014, some of these conditions have been relaxed. The relaxed conditions are:

• Minimum area requirements, in case of

1. Construction-development projects - built-up area of 20,000 sq. mts now from 50000 sq. mts.

• Investment

1. Minimum capitalization for wholly owned subsidiaries - US$ 5 million now from US$ 10 million.

These relaxations will hasten the growth of real estate development in tier 2 and tier 3 cities, because with new rules, small scale developers can also have access to FDI.

• Incentives for Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts are investment vehicles which are used to pool in investments from retail investors and the money is invested in real estate projects with steady stream of rental income. REITs are successfully used in many developed and developing countries. Mr. Arun Jaitley has announced that REITs will qualify under certain tax provisions to become a pass-through entity that distributes to its shareholders substantially all of its earnings in addition to any capital gains generated from the sale or disposition of its properties.

This will ease the pressure on banking system and provide liquidity for the real estate sector. 

• Focus on affordable housing

With the objective of providing housing for all by 2022, the government has increased the Rural Housing funds allocation to Rs. 8000 crore for this financial year. At the same time, Rupees 4000 crores have been provided to National Housing Bank (NHB) to provide cheaper credit for the urban households belonging to low income groups.

All of this will add substantial value to the development of affordable housing in financial year 2014-15.

• Development for 100 smart cities

This is a long term vision and by allocating the corpus of Rupees 7060 crores, Finance minister has set the stage for improvement of infrastructure in Indian cities. While, it may take years to realize the development of 100 smart cities, but nonetheless, it is a welcome step. It has been argued that the allocation is paltry in relation to the levels of investment required to realize a Smart City. Minister Jaitley's speech was marked by a silence about raising investment in this sector through the Public Private Partnership (PPP). Overall, this move signifies a positive intention in the right direction.

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