The Union Budget 2017 has brought some cheer to the industry after a long time. In order to give you our take on how it will impact the new home buyer, we need to analyze how the budget impacts various stakeholders in the industry.
Below is our take on its impact for key stakeholders:
The Real Estate Industry
The biggest announcement by the Finance Minister is according infrastructure status on the Affordable Housing segment. What this ultimately means is that real estate developers will be able to get funding at better terms (rates, longer period, etc.) from banks. This will provide stability to developers in the segment which in turn will assuage the fears of end-users and investors. The prospects of construction being held up for want of funds will decrease, boosting the overall market.
Another announcement that will bring down the cost of funding for the industry is that the Foreign Investment Promotions Board is to be abolished in 2017-18 as more than 90% sectors are under automatic route. FDI policy liberalization will be a huge shot in the arm for foreign investors. It will not only encourage large investors but also small and mid-sized funds to invest in India. This will bring in required liquidity in the market and drive down the cost of funding.
As already detailed in our blog post last month, interest rates will continue to fall due to demonetization. In addition, a reduction in the Income Tax rate will benefit buyers and improve their home loan eligibility. So there will be more buyers in the market when the proposal comes into effect.
In addition, a new bill introduced to do away with illegal deposit schemes will be introduced. This will restrict illegal chit fund schemes and can be a good opportunity for real estate developers to encourage people, especially in the middle-income and low-income group, to invest in affordable housing instead.
The Finance Minister has announced that the holding period on immovable property will be treated as Long Term Capital Gains (LTCG) after two years as opposed to three years currently. Currently if a property is sold within three years of purchase any gain from the transaction is treated as short-term capital gain, added to the seller’s total income and taxed according to the seller’s slab rate. The new proposal will now allow sellers to treat the profit on sale of property as a LTCG if they sell the property two years after acquiring it. LTCG tax rate is 20% which will allow sellers to save tax.
Furthermore, avenues to invest in proceeds of property in order to save LTCG tax have been widened. Previously, in order to save LTCG tax investors could only invest in Rural Electrification Corporation or National Highway Authority of India with a maturity period of over 3 years. The FM has proposed in the budget that tax payers can invest in any bond with a maturity of over 3 years notified by the government. Now investors will have more options to invest their money after selling immovable property and will thus improve their confidence in investing in the real estate asset class.
For landowners interested in entering into joint development agreements with developers, they will have to pay tax only with the project is partly or fully completed. Further, change in the base year from 1981 to 2001 will allow them to save on capital gains tax. These proposal will enable developers to get better terms from landowners for outright purchase and joint development agreeemnts.
In Conclusion: The Window of Opportunity
The measures proposed in the budget are likely to improve the real estate industry and market in the coming financial year. As we noted in our previous blog post, the window of opportunity to purchase your first home is now. When the new proposals come into effect in the new financial year (along with all the reasons mentioned in our previous blog post), the market is sure to improve and prices will likely go up. The window of opportunity is open for the next 2-3 months to purchase your home and get the best deal and make your dreams come true. So start planning today, there’s no time like now.