Rejuvenating Housing Sector Through Regulations, Incentives

The Union Budget for 2016-17 provided a significant push to the housing sector. The Government extended quite a few incentives targeted at the Affordable Housing segment under the Pradhan Mantri Awas Yojna (PMAY). It announced 100% tax exemptions for private players constructing affordable housing of 30 sq metres in the four metros and of 60 sq metres in other cities, approved during the June 2016 to March 2019 period, to be completed within three years of construction approval. Minimum Alternate Tax, however, will apply to these undertakings.

Apart from the 100% investment-linked tax deductions for development firms launching affordable housing projects, service tax of 5.6% has also been exempted on services for the construction of such projects under the urban "Housing for All" Mission or PMAY. These moves attempt to address the supply side constraints of developing affordable housing to plug the significant demand gap in this realty segment.

Hopefully, such tax incentives should encourage private players to participate in larger numbers in the construction of projects under the "Affordable Housing in Partnership" component of PMAY. In addition, the Government has also clarified that the unit sizes of such housing projects may not exceed a carpet area of 60 sq metres. These broad guidelines have also been extended to low cost housing schemes of State Governments.

The Finance Minister has, moreover, announced 100% excise duty exemption for Ready Mix Concrete, which is also expected to aid in easing supply side constraints of the real estate sector by bringing down construction cost to some extent.

On the demand end of the housing spectrum, an additional rebate of Rs 50,000 per annum has been announced on housing loan interest for first time home buyers in the affordable housing segment. This announcement, however, is applicable for home loans not exceeding Rs 35 lakh, and for properties not exceeding Rs 50 lakh. This move is likely to fuel affordable housing demand, especially among home buyers in the country's tier II and III towns and cities.

The Finance Minister also provided a boost to the rental housing market with an increase in House Rent Allowance (HRA) deductions. Those not owning a house and not receiving any HRA from their employers previously, can now avail a standard deduction of Rs 24,000 per annum; while for those already availing HRA, the limit has now been raised to Rs 60,000 per annum towards rent paid for their homes.

The recent passage of the Real Estate (Regulation and Development) or RERA Bill is also expected to have positive implications for the housing sector in India. It will hopefully help regulate the sector and promote transparency. If implemented in the right spirit, it could facilitate greater volumes of domestic as well as overseas investment flows into the sector. Above all, home buyer confidence in the property market is likely to revive with the Bill coming into effect.

Moves such as incentivizing the developer community with tax exemptions, as well as incentivizing the end-user by providing tax breaks will hopefully rejuvenate the sluggish residential market.