How FAR should you go?

Floor area ra­tio reg­u­la­tions play a big role in any city’s real es­tate de­vel­op­ment

HT Estates - - HTESTATES - Preeti Sharma HT Es­tates Cor­re­spon­dent

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.

THINKSTOCK

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