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Small steps to stimulate the housing sector

The sector can get a boost and address the severe demand-supply gap in middle income segment if the government can incentivise such development and also make letting out properties attractive

Written by R R Singh |
February 25, 2012 3:17:37 am

Housing,which is one of the three basic human needs is currently in short supply,giving rise to slums and squatter settlements in cities and towns. The urban shortfall is estimated at around 28 million housing units,which is likely to increase given that urbanisation expected to double by the middle of this century.

This calls for some drastic changes in government policies to attract investment in the housing sector and accelerate supply. Fiscal incentives provided to the sector,in the past,has impacted supply as also demand,but there is lot more that still needs to be done.

The National Real Estate Development Council (NAREDCO),a self-regulatory body for the housing sector under the Ministry of Housing and Urban Poverty Alleviation has made several recommendations to the government on budgetary measures that can accelerate housing development in the country.

These measures if implemented ca provide a much-needed fillip to the sector:

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Bring housing within the ambit of infrastructure: Once housing is given infrastructure status,developers and housing finance institutions can raise funds at low rates of interest from domestic and foreign markets.

At present,the option is confined to banks that have very high rates of interest,while some developers have entered the equity markets. Most countries and the World Bank treat housing as infrastructure. In addition,the housing sector should be brought under Section 80 I A of the Income Tax Act,1961. This move would incentivise housing by bringing down the income tax liability of the developers.

Provide special incentives to developers for building smaller houses: More than 90 per cent of the shortage in housing is felt in the 300-1,200 sq ft bracket.

Earlier,under section 80 I B (10),there used to be an incentive for 100 per cent deduction of profits derived from the construction of housing projects up to 1,000 sq ft built up area in Mumbai and Delhi and up to 1,500 sq ft at other places.

It used to be an incentive for developers to construct smaller sized housing units that were aimed at the lower and medium income households. It was,however withdrawn in 2009.

This section should be reintroduced and 100 per cent deduction of profits derived from constructing housing units up to 1,200 sq ft built up area should be allowed. This would go a long way in addressing the housing requirements of the lower and middle income households.

Increase deduction limit for EMI payments: Under Section 24,a deduction of R 1.5 lakh was introduced for interest paid on home loans in 2001,which became effective from April 1,2002.

Hitherto,100 per cent of interest paid on home loan used to be deducted. More than a decade has passed since then,and merely on cost inflation indexation,R 1.5 lakh in 2001 would be close to R 3 lakh today. Simply put,property that cost R 20 lakh in 2001,would be R 40 lakh today.

This presents a strong case,merely on the basis of cost indexation,to increase the deduction limit on account of interest payment,from R 1.5 lakh to R 3 lakh.

Increase in exemption limit of rental income: Given the increased migration on account of the economic opportunities,there is a need for increased supplies of rental housing in our cities. The current supply is inadequate because of the low rate of return on the investment made in the property. Since all cannot own houses due to various reasons,40-50 per cent of the total housing stock ought to be in the rental market.

A fillip in this direction can be given by increasing the deduction limit on rental income under Section 24 (a) from the present 30 per cent to 50 per cent. A potential landlord would be taxed for only the other half of the rental income.

This provision is necessary to incentivise homeowners to rent out their properties and also for developers to build housing stock for rental purposes and that way,increase the supply.

Capital gains exemption: Under Section 54,investment of capital gains from the sale of a house property,if made to purchase another house property is exempt from capital gains tax. In case the capital gain is more than the cost of the house,tax is payable on the remainder.

Investment in housing would get a boost if the entire capital gain invested on the purchase of a residential property be exempt from capital gains tax.

Remove service tax on residential construction: The imposition of 10 per cent service tax on residential construction,when the government is struggling to meet the demand-supply gap in housing,especially in low income groups is a deterrent for it raises the cost by about 3 per cent. It is imperative that service tax on residential construction be withdrawn.

—The author is director-general,NAREDCO

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