How FAR should you go?
Floor area ratio regulations play a big role in any city’s real estate development
The continuous rise and fall in property prices over the past few years, particularly in large cities such as Delhi and Mumbai, has kept the property market buoyant. Changing sentiments in the real estate market have placed at least one category of homebuyers in a very fortunate situation—those who booked yet- to- be- constructed properties a few years ago. These buyers have seen the prices of such properties go up as compared to the price at which they were booked. Many property buyers are also often tempted to sell these assets while they are still under construction.
A critical point that most property buyers miss out on is the tax implication on sale of properties that are still under construction. A buyer generally books a property with a builder much before construction is completed. In many states, property registration takes place only when the possession is passed on to the buyer after con- struction is completed. What most buyers do not know is the fact that a contractual right on an underconstruction property is also a capital asset under tax regulation even though the property is yet to be registered in the name of the buyer. So, is the sale of rights on an under-construction property before actually getting possession of such property subject to capital gains tax? The term ‘transfer’ as defined under the Income Tax Act, 1961, (IT Act) is not limited to sale, exchange or relinquishment of a capital asset, but also includes extinguishment of any right in a capital asset which takes place when the owner abandons his rights on the property. Further, ‘ capital asset’ is also defined widely to include any ‘property’ and hence rights in an underconstruction property can also be regarded as ‘capital asset’. In other words, a fully constructed property which is already registered in your name is no doubt a capital asset. But at the same time, a right to receive possession of an under-construction property booked by the buyer and on which initial advance has been paid is also a capital asset subject to capital gains taxation.
How can the date of acquisition and the nature of capital gain – long-term or short-term be determined?
Yet another issue that arises in the context of transfer of rights in the property under construction is the date of acquisition of the right for the purpose of classifying the capital gain as shortterm or long-term capital gain.
The period of holding an asset determines whether the gain is long-term or short-term. The gain arising from transfer of the capital asset held for more than 36 months is a long-term capital gain; otherwise it is a short- ter m capital gain. For under-construction properties, one view in respect of date of acquisition is that the date of booking of property and/ or the date of payment of initial advance would be regarded as the date of acquisition. For example,if you have booked a property in 2010, which is still under construction and you would like to transfer the right on such property in 2014, any gain on such transaction will be considered a long-term capital gain. The other view could be that the right would come into existence only when the property is registered in the name of the buyer and the builder passes on possession of the property to the intended buyer. Indian courts have resorted to both these views at different points in time.
While it is possible to consider the date of booking of property and/or the date of payment of initial advance as date of acquisition, this view could vary depending on facts of each case and the documents executed/ provided by the builder to the intended buyers. In case you are planning to sell your under-construction property in the near future, it would be worth evaluating the tax advantages of selling the right on such property before getting it registered in your name.
Can you plan your taxes by reinvesting this gain in some other property? Long- ter m capital gains arising from sale of under construction property can be exempt if the sale proceeds are reinvested in specified assets. For example, purchase of residential house property within two years of sale of underconstruction property or construction of residential house property within three years of sale of under-construction property would make an individual eligible for exemption subject to fulfilment of other conditions.
The tax scenario in respect of under-construction properties is significantly uncertain. Real estate investors should, therefore, tread with caution while investing money in under construction properties. It is important that you explore all planning opportunities and take an informed decision before finalising the transaction as that may help to reduce your tax burden.
Among the various regulations adopted in real estate development, Floor Area Ratio (FAR) is one of the most critical because it decides the intensity of development which is permitted in a certain area. Recently, the fact that the urban development ministry raised the FAR for residential areas in Delhi to 200% made headlines because this will lead to a significant increase in built- up areas in many parts of the city, thereby infusing critically needed residential supply.
FAR regulations play a big role in any city’s real estate development profile and it is therefore important to understand the concept. FAR parameters vary from state to state and are governed by the respective city development authorities.
In other words, increase or limitation of FAR is not cityspecific but area-specific. Every city has its own areas where higher FAR is permitted, with the intention of encouraging or accommodating growth of a certain market segment. Such ‘special’ FAR will not be applicable in other areas of the city, say real estate experts.
Who makes t he FAR rules?
The ministry of urban affairs, which is the apex body that formulates and administers rules, regulations and laws related to housing and urban development in India, has provided general guidelines via the model urban and regional planning and development laws.
However, the implementation of these guidelines is entirely city specific and therefore in the hands of the respective city development authorities. Essentially, it is the city authorities that are empowered to plan the development of their respective cities. Whenever a new area opens up for development, a city’s development authority will lay down a master plan that stipulates the land use zone, regulations that control development and permissible FAR for various uses.
How is FAR calibrated?
FAR is calibrated according to the nature of a project in terms of the intended usage. Generally speaking, on a plot of 100 square yards with a permissible FAR ratio of 2 allows a total built-up area of 200 square yards – the plot area multiplied by the FAR is the amount of construction that is permissible for that plot. FAR for various zones and type of usage is notified by the local development control regulations. FAR in restricted zones like, say, Lutyens Delhi, may be 1 or even lower, while it would be higher in suburbs.
Pros and cons of increasing FAR in cities
There are advantages and disadvantages to increasing FAR. Lower FAR means higher horizontal growth, which is positive in terms of environmental sustainability but negative in terms of available supply. Higher FAR i mplies l ower horizontal spread and therefore lower consumption of available real estate, which means that it limits the escalation of property prices to that extent. It also implies a more workable set of infrastructure parameters than horizontal spread calls for.
Providing infrastructure to accommodate horizontal growth (i.e. lower FAR) implies more infrastructure over larger geographic areas, whereas higher FAR calls for more intense and specific infrastructure. Increased FAR basically allows developers to save on land costs, and gives them a wider arena to operate on. This means that the units in the projects they build will be cheaper and also more plentiful in profitable areas, which is beneficial for property investors and their eventual buyers alike.
However, increasing FAR in some of the city’s areas for this reason alone is not a good thing, as it will result in an infrastructure deadlock and eventual fall in prices.