FIRST-TIME HOME BUYERS HAVE IT GOOD
...but Budget 2017 has not been so kind to ‘investors’
Budget 2017 was a mixed bag for real estate investors. It reduced the holding period for capital gains in sale of real estate to qualify as long-term capital gain to two years (from three earlier). It also changed the base year for calculation of said gains with indexation benefit from 1981 to 2001. While these two changes have brought cheer, the simultaneous move to cap how much loss from house property can be set off against any other income head will be a big damper.
Property on rent
For property that has been let out, a home buyer can now set off losses only up to Rs 2 lakh a year. Earlier, in case of let-out property bought on a home loan, the owner was allowed to deduct the entire interest cost from income from house property. This generally translated to loss from house property since the rent yield is low and the home loan interest payment high in the initial years, thereby reducing the tax liability.
For example, if the interest cost on a let-out property was Rs 5 lakh a year, the entire amount was deductible earlier—a tax saving of Rs 1.5 lakh (30 per cent of Rs 5 lakh) for those in the highest tax bracket. Now, the saving on tax will be limited to Rs 60,000 (30 per cent of Rs 2 lakh).
Earlier, owners of let-out property enjoyed a significant tax advantage compared to a self-occupied home. Now, the Rs 2 lakh cap will bring them on par with owners of self-occupied property. This is bound to impact those who used to buy a second home to save tax. If such investors leave the real estate market, it may hit prices.
What should investors do?
The budget was expected to provide tax incentives to boost the real estate sector, which has been in the doldrums. But the government has made its priorities clear by introducing tax breaks for affordable housing—it wants to push affordable housing and the purchase of first homes.
Real estate is expected to recover at some point, but experts won’t bet when. In any case, real estate prices are unlikely to rise at the pace they did in the past decade. Investors in real estate need to be more realistic about returns and should be willing to hold their investments for the long term.
Those investing with borrowed capital will get fewer tax incentives, and thus lower effective rental yield. So do a cost-benefit analysis before investing.