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Economy

Real Estate: Not A Happy Note

Ramifications of a budget are beyond taxes. But usually, the real estate fellows desire and get a little bit of an exemption here and there. Not this time, it seems. Here’s two limiting items in the Budget.

Home Loans Get Additional Tax Deduction on Interest, But Wait

When you pay interest on a home loan, that interest is tax-deductible upto Rs. 150,000 on your primary residence. That means you can reduce this much from your income if you’ve paid it as interest. This is quite inadequate in most cities, where even a matchbox costs more than 50 lakh. A loan of Rs. 40 lakh at 10% would give you an interest payment of nearly Rs. 400,000. Obviously this is much greater than the 1.5 lakh exemption.

The FM has introduced a higher exemption. Another Rs. 1 lakh is exempted, when paid as interest. However, there are restrictions:

  • The loan needs to be taken in the year 2013-14
  • The loan should not exceed Rs. 25 lakh
  • The house should not cost more than Rs. 40 lakh
  • The borrower should not own any other property at the time of loan sanction

This means that effectively, you can’t even transfer an existing loan to avail of this exemption. (There is a wild exemption: if you have a house that qualifies in points 2 and 3 above, but it hasn’t yet been completed, you might be able to transfer the loan to a new bank and meet the conditions above)

Unfortunately the numbers don’t add up. Even if you consider a loan of Rs. 25 lakhs, you will just about pay Rs. 2.5 lakh in interest at a loan cost of 10%. But since such loans get a better deal from banks (who get a better deal from RBI in terms of capital allocation for such loans), and also because interest rates might come down, the limit of Rs. 2.5 lakh may not be fully utilized.

(For such a case, you can use the “unutilized” amount in the subsequent year, but that’s only the differential amount.)

This isn’t so great for builders because the cost of land and construction in most cities exceeds the Rs. 40 lakh limit in most cases. However, there are economical projects in the outskirts that should benefit.

Real Estate Transactions May Get Higher Service Tax Charge

The memorandum says this:

At present taxable portion for service tax purpose is prescribed as 25% uniformly for constructions where value of land is included in the amount charged from the service recipient. This is being rationalized. Accordingly, where the carpet area of residential unit is upto 2000 square feet. or the amount charged is less than One Crore Rupees, in the case of ‘construction of complex, building or civil structure, or a part thereof, intended for sale to a buyer, wholly or partly except where the entire consideration is received after issuance of completion certificate by the competent authority’, taxable portion for service tax purpose will remain as 25%; in all other cases taxable portion for service tax purpose will be 30%. This change will come into effect from the 1st day of March, 2013.

This is unnecessarily complicated. It’s like this:

  • You buy from a builder today, you pay service tax (12.36%) on 1/4th of the total value. That is, you pay 12.36% of 25% of the value, so you pay about 3.09%.
  • From tomorrow – March 1,2013 – you will pay the same service tax but on 30% of the property value if certain conditions apply. That will take your effective tax up to Rs. 3.71%.
  • What conditions for the higher tax? A house with a “carpet” area greater than 2000 sq. ft. , where you’ve paid more than Rs. 1 crore, and where you have paid the whole amount after the completion certificate was issued. Say “no” to any one of these, and nothing changes for you. (You’ll pay the same old 3.09%)

In context, the amount, for a Rs. 2 crore large house, bought directly from a builder, will cost Rs. 1.24 lakh more.

These conditions might be easily skippable for borderline properties (carpet area is usually about 70% of the area you pay for, or less).

Both of the above notes in the budget are not very great for housing companies, but at least for the most part it is status quo.

  • Muty says:

    Hillarious! Isn’t it?
    Carpet Area of 2000Sft. Your spending is more than that 50L mark, so get that 1% from you.
    Affordable housing?
    Maximum Price: Rs.40L
    Maximum Loan: Rs.25L
    So, Mr.FM makes Rs.15L paymanet in Black-OFFICIALLY.
    You can do anything after becoming a FM….Ofcourse, he promised too many FM Stations!
    But for 40L house, I need to go at least 20KM out of City, which converts to transportation and other related costs. Essentially you have a zero sum game on hand.
    I get the feeling that I took a right decision 10 years back………..Or is it wrong?

  • Muty says:

    The DPR::::
    Loan amount Rs.25L.(Assuming that the builder is willing to take the rest in Black)
    The Interst Portion exempted(Rs.2.5L) will never be reached. (See with a 10% Rate). Not even for 30Years Loan!
    By the way, what happened to the interest subvention of 1% under the 25L loan limits? Is it applicable for only last FY?
    Obviously some one did not do his HOME WORK thouroughly.