Comprehensive Pre-Budget Overview and Analysis by CBRE

Mr. Anshuman Magazine, Chairman & CEO – India, South-East Asia, Middle East & Africa, CBRE.

Housing Sector

1. The interest deduction limit on housing loans under Section 80C of the Income Tax Act (I-T Act) 1961 (under the old regime) is INR 1.5 lakh per annum.

•  With the rising prices of residential units, we recommend increasing this limit of INR 1.5 lakh per annum to at least INR 4 lakh per annum.
• Also, this tax deduction should be entirely moved out of Section 80C, since it gets clubbed with other critical instruments such as life insurance, PPF, etc.

2. The limit of interest deduction under Section 24B of the I-T Act on housing loans stands at INR 2.0 lakh per annum to incentivize homebuyers.

•  As the proportion of the interest payment is higher in the initial years of the loan tenure, we urge the government to raise this limit to at least INR 5 lakh per annum. It should be noted that the exemption limits provided under Sections 80 C and Section 24 B of the I-T Act have remained stagnant for a long time and have not been indexed to inflation.
•  The government can also introduce tax incentives under Section 80C for real estate investment trust (REIT) investors. This would enable REITs to emerge as an attractive tax-saving instrument, further encouraging prospective investors.

3. Under Section 180EEA, first-time homebuyers under the affordable housing category receive an additional I-T deduction of INR 1.5 lakh for interest paid on home loans started in FY19-                 20. This deduction was extended to March 31, 2022. We recommend that this deduction be revived, and its scope expanded to cover at least the mid-end segment.

4.  Long-term capital gains from the sale of house property are presently taxed at 20% through a special provision similar to Section 112 for equity shares. In addition, the period of holding a house property is currently 24 months to qualify as a Long-term Capital Asset (Section 54 of the I-T Act 1961). The new property must be purchased either one year before the sale or two years after the sale, or the new residential property must be constructed within three years of the sale of the property. If one sells a house within 24 months, they must pay an STCG tax on the gains as per the applicable income-tax slab.

• The recommendation is that the tax rate be reduced from 20% and the holding period for a property be reduced from 24 months to 12 months so that there is no capital gains tax liability for the same.
• The cap of INR 2 crore on capital gains for reinvesting in two properties should also be removed.
• In addition, the time duration for under-construction properties can be extended by at least a year (currently, it is three years) to provide some cushioning against any disruption in labor or material availability.

5. There are three different holding periods applicable for the calculation of capital gains i.e., 12 months, 24 months, and 36 months for different categories of assets, and tax rates vary from 10 to 20%, depending on various factors such as with/without indexation, listed/unlisted, resident/non-resident, etc. We recommend that the government simplify the tax regime by reducing the current three categories of holding periods to two.

6. In Budget 2023, the government set a ceiling of INR 10 crore for the long-term capital gain tax deduction for reinvestment in residential properties under Sections 54 and 54F of the Income Tax Act. The same limit has been set for the Capital Gains Account Scheme. Earlier, there was no maximum limit set on the account. The new limit will be applicable from April 1, 2024, and will apply about the assessment year 2024-25 and subsequent assessment years. We recommend that this limit be removed as it can be a big deterrent for HNIs/big-ticket residents. reinvestments.

7. Further, capital gains on listed shares are considered long-term if the holding period is 12 months. For REITs and InvITs (infrastructure investment trusts), it is 36 months. We recommend that the latter two instruments be standardized to 12 months.

Affordable housing

1.  Currently, the criteria for affordable housing are based on the cost of the property (INR 45 lakh), carpet area (60 sq. m to 90 sq. m), and income of the homebuyer (EWS / LIG).

• We recommend expanding the cost, size, and income criteria to make the scheme more inclusive.
• The government should consider increasing the size criteria for metro cities to 90 sq.m. and establishing three to four brackets of unit sizes and prices to define the eligibility criteria depending on city/state dynamics, as capital values in larger metro cities (Mumbai, Delhi-NCR) can be significantly higher vis a vis other cities.

2. Increased budgetary allocation towards the Pradhan Mantri Awas Yojana (PMAY) over the previous year, coupled with the recent Cabinet announcement to provide financial assistance to construct an additional three crore rural and urban houses under the scheme, underscores the government’s ongoing commitment to bolster the affordable housing sector. The scheme’s timely implementation holds significant potential to invigorate the sector further. We also eagerly await further details concerning the PMAY-Urban scheme, in light of the Interim Budget 2024-25 announcement about the government’s plan to launch a scheme to help deserving sections of the middle class living in rented accommodations, slums, chawls, and unauthorized colonies to buy or build their own houses.

3. Under Section 80IBA, the government provided a 100% tax deduction of the profits and gains derived from the business of developing and building affordable housing projects. However, the tax holiday expired in 2022. A revival of the scheme would benefit developers of affordable housing projects, as such projects typically operate on thin margins.

GST rationalization, adjustments, and further amendments

1.  The construction industry, experiencing rising construction costs over the last few years, saw some respite in 2023, with prices cooling off. In 2023, a gradual decline in material prices led to a tapering of the CBRE input material cost index. As steel and cement are two high-impact components of the construction process, we request the government to lower the GST on both. While cement can be included in the 18% slab (28% currently), steel can be included in the 12% slab (18% currently).
2.  For housing projects, barring the affordable housing segment, GST is applicable at the rate of 5% without the input tax credit (ITC). The GST for affordable housing stands at 1% without the ITC. The GST on key construction materials, such as marble, tiles, glass, and prefabricated structural components, etc., varies between 12-28%. Due to its cascading effects, it is requested that the GST Council reinstate ITC.
3.  Transfer of development rights (TDR), Deed of Assignment, and allotment of land on long-term lease against a one-time premium should be outside the ambit of the GST.
4.  The developers, who construct buildings for leasing out the same are struggling with the enormous financial implications of increasing construction costs. Construction cost typically ranges from 32% to 38% of total project cost, and given GST is applicable at the rate of 18% on such services (which becomes the cost for the company), there is a considerable cost that is borne by the industry due to the specific restriction in availing ITC. Thus, we propose that the government grant ITC to these firms.
5.  There is a demand to reduce the TDS rates on coworking spaces as most of the receivables from the client are towards services. The expectation is to bring coworking spaces into the 2% TDS slab, as in the case of services, from the present 10%. This will immensely help the coworking spaces segment in the management of their cashflows.

Land

1.  The Government has several unused or sub-optimally used land parcels available to itself or public sector enterprises. These could include Port Trust land, railways, defense unused land parcels, etc. We recommend unlocking these land parcels and partnering with credible private developers to develop affordable housing once the land and approvals are in place. These land parcels could also be leveraged for the development of industrial parks and related infrastructure. This will not only reduce development risk but will also help the government leverage the private sector’s operational efficiencies.
2.  We also urge the government to provide a comprehensive framework regarding changes in land usage to fast-track development and make land acquisition smoother.

Rental housing

1.  While the passage of the Model Tenancy Act (MTA) is a positive move for the rental housing segment, India continues to be at the lower spectrum of gross rental yields, with most investors historically relying on property price escalation for financial returns. The government can consider providing certain exemptions to this segment through a 5-year property tax holiday, facilitating ease of capital for build-to-lease and rent-to-own residential projects by instituting a special fund for such developers, etc.
2. Further, the pace of adoption of the act remains slow among the states. So far, only a few states such as Andhra Pradesh, TN, UP, and Assam have revised their tenancy acts on the lines of MTA. The government should encourage states for a faster adoption of the MTA to streamline this sector.
3. The HRA exemption has not kept pace with rising rentals across cities. The government can thus consider increasing the HRA exemption by 15-20% in employees’ salaries to give a boost to rental housing.
4. For landlords of residential units, a standard deduction of 30% of the Net Annual Value (NAV) is allowed to every taxpayer. This 30% deduction is allowed even when your actual expenditure on the property is higher or lower. Given the rising inflation and to improve the effective returns from rental housing, the NAV standard deduction from rental income under Section 24 (a) of the Income Tax Act should be increased to 50% from 30%.

ECB for construction finance

1. The External Commercial Borrowing (ECB) framework, issued by the RBI under FED Master Direction No.5/2018-19, prohibits companies availing ECB from using the proceeds for the construction or development of regular housing projects and there is ambiguity regarding their usage for the acquisition of land for affordable housing projects. To enable growth in the real estate sector, it is requested that these relaxations be provided under the ECB framework.

Green goals

1. India is aiming for a massive 500 GW of renewable energy capacity by 2030 as per its COP26 commitment. Despite the challenges, India has made impressive strides and is poised to increase its renewable energy capacity from 132 GW in October 2023 to 170 GW by March 2025.

The government, through its Budget announcements, can increase its support for renewable energy adoption through initiatives such as low-cost financing, and tax breaks for developers and consumers. Additionally, upgrading the transmission infrastructure for smart grids is crucial to managing the intermittent nature of renewable energy sources.

2. The government should set up a ‘carbon market stabilization fund’ to encourage industries to take up investments towards low emission technologies and processes.

3. The budget should create a roadmap for sustainable growth in the logistics sector and incentivize logistics players to adopt sustainable practices such as allocating incentives for LEED-certified warehouses and reducing tax for green fleets in the supply chain.

I&L

1. 1. While the government has exempted the integrated GST of 5% on ocean freight imports effective from October 1, 2023, the integrated GST of 5% applicable on international outbound ocean freight and 18% on outbound air freight persists, following the government’s withdrawal of the exemption on the same in 2022. The government should consider implementing zero-rating of GST for all international transportation services to facilitate trade align India with international tax practices and reduce logistics costs.