Will scrapping LTCG yield any benefits for real estate sector?
The expectations from the Union Budget 2020-21 have never been higher, and real estate definitely has a comprehensive wish list. One expectation making the rounds is the possible scrapping of long-term capital gains tax (LTCG) on sale of property.
It is assumed that this will benefit the real estate considerably. However, this may not be entirely true and could, in fact, be counter-productive and detrimental.
Besides the usual expectations of according industry status and single-window approval process, real estate particularly hopes for the quick implementation of alternative investment funds to rescue stressed residential projects and easy access of capital for developers. After all, the real estate sector contributes over 8% to the Indian economy – and has justifiable expectations from Union Budget 2020-21:
Hike the INR 2 lakh tax rebate on housing loan interest rates under Section 24 of the Income Tax Act
This could kick-start healthier demand for housing, especially in the affordable and mid-segment categories.
Speed up infrastructure development
The Government’s hard focus on infrastructure development is beyond dispute, but its plan to spend INR 100 lakh crores on infrastructure over the next five years can only yield tangible economic results with speedier on-ground implementation. There is a dire need to iron out bottlenecks hampering infrastructure growth.
Personal tax relief, either by a cut in tax rates or favourably readjusted tax slabs
The last increase in the deduction limit under Section 80C (to INR 1.5 lakh a year) was in 2014 and an upward revision is long overdue.
Include ITC benefit in GST for under-construction homes
While the GST rate on under construction properties was reduced to 5% in 2019, the previous ITC benefit was shelved. Already cash-starved developers cannot avail tax benefits for construction raw materials and the increased costs are passed on to buyers. Providing ITC benefits is a great incentive to reduce property prices and make under-construction homes attractive again.
Immediate deployment of INR 25K crore AIF
The clock is ticking, and the government needs to act immediately. The allotted stress funds need to be utilized to full potential without delay. Completion of stressed projects will improve homebuyer sentiment and boost demand.
Ease liquidity
The ongoing liquidity crunch has a cascading impact across sectors, including real estate. Project delays - the biggest fallout of the cash crunch – have severely dampened buyer sentiments. Easing liquidity will increase capital flow for developers and keep supply - most importantly of high demand ready-to-move-in homes - healthy.
Improve credit off-take from banks
The NBFC crisis has hit the sector hard, and there is enough justification to warrant credit off-take. Apart from recapitalization by the government and stringent measures by RBI, the gross NPAs of banks also improved to nearly 9.1% towards September-end 2019.
More incentives for private sector investments in affordable housing
Despite the benefit of infrastructure status for this critically important segment, developers are unable to get funding from major banks and NBFCs at lower interest rates. The profit margins for affordable housing projects are unattractively low.