Budget fine print: A Rs 2-crore home in Mumbai could qualify for affordable housing subsidies

The Union Budget presented on February 1 has been described as a game-changer for the struggling housing sector, having decreed infrastructure status for the affordable segment. But lost in the scramble of ra-ra reviews is the fact that the definition of affordable has been so stretched that a Rs 2-crore home in Mumbai or a Rs 1.5-crore flat in Bengaluru will now fit this category, allowing hordes of developers to cash in on the subsidies and incentives that come with catering to this segment. It may also be cruel irony for the 20 million families searching for a roof in the country, 95% of whom cannot afford anything that costs more than Rs 10 lakhs.

The housing sector was a focus area for Finance Minister Arun Jaitley’s Budget proposals. An entire chapter in the explanatory notes to the Finance Bill 2017, titled Measures for Promoting Affordable Housing and Real Estate Sector, was dedicated to it. The minister enlarged the definition of what is affordable housing by introducing the concept of carpet area (the area enclosed within the walls), overriding the dubious builder definition of built-up area (carpet area plus outer walls, balcony and other common areas). Thus, a carpet area of 30 square meters in the four big metros of New Delhi, Mumbai, Chennai and Kolkata, and of 60 square meters in smaller cities make for affordable units. And with this, the actual usable area has increased the benchmark by as much as 20% to 50%.

Other Budget proposals included giving developers tax relief on unsold stock as they will now need to pay capital gains (the profit earned from the sale of property) only in the year the project is completed rather than at the start of the project. Also, the holding period for capital gains tax for immovable property has been reduced from three years to two years, and developers can avail of a tax break of one year after receiving the completion certificate for unsold stock.

A tall order

Where is this all coming from? These Budget proposals are undoubtedly a sign of desperation where the government has chewed off more than it can deliver. The country faces an estimated housing shortage of 18 million units, which if not tackled on a war-footing will balloon to about 30 million units by 2030. It was in this context of delivering “development and growth” that Prime Minister Narendra Modi unveiled the Pradhan Mantri Awas Yojna on June 25, 2015, promising “housing for all by 2022”. Even on paper, this is a tall order. A target of 20 million homes in six years translates into completing approximately three million units a year.

On the ground, the scheme has been a non-starter. Government data shows that in the first year up to July 15, 2016, just 19,255 housing units were completed. That month, Rao Inderjit Singh, minister of state for housing and urban poverty alleviation, conceded in a reply in Parliament that though 864 projects involving 7.3 lakh homes had been approved, work was in progress in only around one lakh of these, or less than 15% of the approvals. Again to put it in context, the government has to deliver three million (30 lakh) units a year to make good on its promise of housing for all. A far cry indeed.

It is not difficult to see the contours of the problem. Construction of the volume of houses envisaged through sarkari arms such as the Delhi Development Authority or the Maharashtra Housing and Area Development Authority is an impossibility considering the mobilisation capacity of these bodies and the red tape they are trapped in. The solution this Budget has fallen on is to harness the vast array of private developers. But the challenge before Jaitley is how to move a tribe of developers focused on upper-income housing projects to build homes for the poor and the marginalised.

Size over cost

Obviously, last year’s measures did not work. Budget 2016 had allowed 100% deduction for profits to housing projects building homes of up to 30 square meters in the four metros and 60 square meters in other cities. But these were based on built-up area, which aggregates and includes common areas as well in the cost of a flat and are seen as too small a unit by builders.

So, Jaitley this year stretched the definition by introducing the concept of carpet area that makes an affordable home up to 50% larger. However, by defining affordable housing by size rather than a cap on cost, has the government defeated the very purpose of the measure? A 30-square-meter carpet-area home in Mumbai or Delhi, with loading and exemptions, translates into a 500-square-foot one bedroom-hall-kitchen, while a 60-square-meter affordable unit in Bengaluru can be pushed up to a 1,000-square-foot two-bedroom house. At Rs 40,000 a square foot in Mumbai’s Parel area, the affordable unit could be sold at Rs 2 crores; or at Rs 15,000 a square foot, a budget home in Bengaluru could fetch Rs 1.5 crores for the builder.

“When I did the math of the size and value of homes builders can construct and still claim the slew of concessions at a round table after the Budget, I could see the gleam in the eye of several developers who saw a new opportunity,” said Pranay Vakil, founder of realty broking house Knight Frank India and now heading Praron Consultancy.

The incentives

The new, enlarged definition of affordable units will now be eligible for 100% deduction of profits and gains under Section 80-1BA of the Income Tax Act. And to add a sweetener, eligibility for claims under this section has extended the period of completion of these affordable projects from three years to five years.

“Besides the tax-free status, there are several other big concessions builders can avail of under ‘infrastructure’ status,” Vakil explained. “Bank capital will be available at 2% lower interest rates for infrastructure projects, and under this category, banks can advance a larger volume of funds. Builders can also access foreign capital through the external commercial borrowing route,” he added.

The only downside is that these concessions are available for entirely residential projects and builders will not be able to exploit mixed-use potential, as commercial area will be limited to 3% of the project cost. While greater access to cheaper bank and foreign finance will help clean the system, there is, equally, the danger of heavy misuse and of a lot of this affordable stock landing up in the possession of upper-income groups. “Those who want to bend the law can build projects that allow two adjacent flats to be clandestinely merged and sold as one to the same family,” warned Vakil.

Another interesting measure in the Budget proposals is the use of a capital gains concession to make it attractive for land-owning families on urban peripheries to merge and aggregate their farm land (or other lands) as part of development projects. Earlier, in joint venture agreements between landholder and developer, under Section 45 of the Income Tax Act, capital gains was charged in the year the land transfer took place. However, as per a new amendment, capital gains will be charged only at the end of the project, when the completion certificate is issued for the whole or part of the project. This will provide relief to landholders who were forced to pay up on notional gains as partners in a housing project at the start, whereas the bulk of the revenue from sale actually comes in towards the closure of the project. However, this provision is only applicable to individual or Hindu Undivided Family landholders and not corporates or other entities.

Home buyers left out

Significantly, the Budget has very little to offer as direct sops to the home buyer. For instance, it was expected that the maximum deduction of Rs 2 lakhs, when calculating income tax, paid as interest on a home loan of a self-occupied home, and the Rs 1.5-lakh cap on the principal amount paid under Section 80C, would be hiked substantially this year as relief to a populace suffering the pains of demonetisation. This did not come about.

The incentives are clearly loaded on the supply side, and designed to push builders to construct more and cheaper homes. Whether this will come about is yet to be seen.

On the other hand, a concession to the middle class that allowed losses incurred on account of ownership of house property to be set off against income has been substantially trimmed. This was a notional concession wherein a second home owner could load the loss of interest he could have earned from rental income as a deduction from his total earnings. This was an unlimited facility which has now been capped at a maximum deduction of Rs 2 lakhs.

Property experts said the finance minister also passed over an opportunity to correct the impractical provisions in Section 50 of the Income Tax Act, which are stymieing residential sales. Under this provision, inserted in 2003-’04, if the valuation of a property in the sale deed is less than the provisions of the circle rate / ready reckoner (the minimum value at which property can be sold or bought), which determine stamp duty, then for the purpose of capital gain, tax will be calculated at the government-designated rate.

This has become a huge overhang in recent days with property prices having fallen while the government-designated circle rates continue to be hiked to unrealistic levels to garner more revenue. Vakil gave the example of a South Mumbai house that sold for Rs 7 crores but for the computation of capital gain, a ready reckoner rate of Rs 9.1 crores was applied. “This is deterring sales and encouraging stagnation,” he said. “The situation is so ridiculous that when the new buyer wants to sell the flat again, the authorities will not apply the Rs 9.1-crore valuation to the flat but insist on taking the Rs 7-crore value in the instrument of sale.”