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What does 2015-16 Budget mean for Real Estate Sector?

The 2015-16 Union Budget released by Finance Minister Arun Jaitley dashed expectations of the Indian real estate sector that was hoping for significant reforms and changes to boost the housing demand. However, the budget still contained some positives that will benefit the sector.


The real estate sector was expecting an increase in the limit of interest deduction on housing loans from INR 2 lac to at least INR 5 lac to spur home buying, subsidizing interest rates for first-time home buyers, clarity on smart cities, tax holiday on new affordable housing projects and industry status to the sector. However, Arun Jaitley chose not to address most of these expectations in the budget. Some of the major changes or announcements that were relevant for real estate sector or will impact it directly or indirectly included:

CONTROLS TO CURB USE OF BLACK MONEY IN REAL ESTATE: The biggest announcement of the 2015-16 budget was the launch of 'Benami Transaction Bill’. The bill will enable confiscation of Benami property—or property that’s registered in the name of either a fictitious person or a third party to hide the identity of the real owner—and provide for prosecution. Anuj Puri, Chairman & Country Head, JLL India says, "Incentivising usage of wired money rather than cash transactions has significant pertinence to real estate, which is one sector where cash transactions have been impacting transparency. Another boost to transparency in the real estate sector is the enhanced punitive measures which will now be taken
on concealment of assets, including Benami properties."


CONTINUED COMMITMENT TO ‘HOUSING FOR ALL’: In-line with the government’s earlier announced housing-for-all policy, Jaitley revealed intention to build 6 crore homes (2 crore in rural and 4 crore in urban areas) by 2020; however, he did not reveal how this will be achieved. With the lack of clarity on the smart city development initiative, and no clarity on which cities will be developed as smart cities, it is unclear how will government achieve this vision in 5 years.


FOCUS ON EXPEDITING REAL ESTATE PROJECT APPROVALS: Finance Minister also announced creation of an expert committee that will work on legislation to expedite the approval process using pre-existing regulation. Experts feel that this is a step to move towards single-window clearance. The real estate sector has been plagued with project delays due to slow approval process, and developers have been calling for a single-window clearance for faster approval for some year now.


RATIONALIZATION OF CAPITAL GAINS ON REITs: Finance Minister Arun Jaitley rationalized capital gains taxes on Real Estate Investment Trusts (REITs) to pave the way for REITs listing in India. In last year's Budget, the government had allowed partial pass-through status to REITs, and in the current budget it provided capital gains exemption to REIT sponsors at the time of exchange of units. Under the regulation, the rental income earned by REITs will be considered as a pass-through and will be taxed in the hands of unit holders. However, Jaitley did not address the issue related dividend distribution tax, which may continue to be applicable.

"A large quantum of funds is locked up in various completed projects which need to be released to facilitate new infrastructure projects to take off. I therefore propose to rationalise the capital gains regime for the sponsors exiting at the time of listing of the units of REITs and Infrastructure Investment Trusts (INViTs), subject to payment of Securities Transaction Tax (STT). The rental income of REITs from their own assets will have pass-through facility," Finance Minister Arun Jaitley said while presenting the Budget.


INCREASE IN SERVICE AND EXCISE TAX TO INCREASE REAL ESTATE COST: As a preparatory measure for the launch of GST in 2016, the government decided to increase service tax and central excise duty. The service tax, which has been increased from 12.36% to 14% is expected to marginally increase property prices. As per CREDAI Chairman Lalit Jain, "Hike in service tax will lead to increase in property prices by nearly 0.5% of the total cost,".


WEALTH TAX ABOLITION TO BOOST REAL ESTATE: Introducing an additional surcharge of 2% on super-rich individuals, those with an income of INR 1 crore and above, the finance minister announced an end to the wealth tax. The move will benefit the majority of Indians, who will no longer have to pay any tax on property ownership and only super-luxury homes will be taxed.


ALLOCATION TO ROAD INFRASTRUCTURE POSITIVE: The Finance Minister also announced creation of National Infra Fund worth INR 20,000 crore to connect 1,78,000 unconnected habitations by all-weather roads. The project will involve building of 1,00,000 km of roads that are currently under construction plus sanctioning and building of another 1,00,000 km roads. The move will provide basic infrastructure to these areas, and in the future will open them for real estate development




Sanjay Dutt, executive managing director, South Asia, Cushman & Wakefield, said “We are disappointed with this year’s budget because except for REITs (simplification of REIT’s taxation) and curbing of Benami transactions, there was no specific mention to the sector this time around, unlike the last Budget presentation.”


“Overall the budget’s direction is positive with several macro factors making way for a better economic regime. However, with three consecutive bad years for real estate that left developers and other stakeholders gasping for fresh air, the expectations were high. Unfortunately, the budget has not given them anything to cheer about,” said Shishir Baijal, chairman and managing director, Knight Frank India.


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