Finance Minister Arun Jaitley has proposed some changes which will help boost the housing sector in our country suffering due to lack of demand and cash crunch after demonetisation. The proposals for promoting the real estate sector are analysed here.
Amendment of Section 80-IBA to promote affordable housing
The existing provisions of section 80-IBA provides for 100% deduction in respect of the profits and gains derived from developing and building certain housing projects subject to specified conditions. The conditions specified, inter alia, include the limit of 30 square metres for the built-up area of a residential unit in respect of a project located in the Chennai, Delhi, Kolkata and Mumbai. However, with the amendments made in this Budget, the specified area to be considered will be carpet area and not the built-up area. Further, the restriction of area of 30 square metres also applied to places within 25 kms from the municipal limits of these four metropolitan cities. With the amendments, the flat to be contructed up to 60 square metres of carpet area in places outside a metropolitan city. Further, it is also provided that in order to be eligible to claim deductions, the project shall be allowed to be completed within a period of 5 years instead of existing 3 years. The amended provisions will take effect from FY 2017-18 (assessment year 2018-19). The amendment is a welcome measure and will help in providing shelter at affordable price to needy people including those in rural areas and the business community in housing sector will be able to save on Income tax due to benefit of tax free income of such projects.
Relaxed provisions for computation of capital gains in the case of joint development agreement
Under the existing provisions of section 45, capital gain is chargeable to tax in the year in which transfer takes place is an exception certain cases. The definition of ‘transfer’, inter alia, includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. In such a scenario, execution of Joint Development Agreement (JDA) between the owner of immovable property and the developer triggers the capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project.With a view to minimising the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, the FM has proposed to insert section 45(5A) to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the year in which the certificate of completion for the whole or part of the project is issued bythe Municipal Corporation or competent authority.
It has been further proposed to provide that the stamp duty value of his share, being land or building or both, in the project on the dateof issuing of said certificate of completion as increased by any monetary consideration received by the land owner in pursuance of signing of the JDA, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the land. However, the benefit of this proposed changes shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion. In such a situation, the capital gains as determined under general provisions of the Income-tax Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without taking into account the proposed amended provisions.
Section 49 is also proposed to be amended so as to provide that the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under the proposed provision. The amended provisions will take effect from FY 2017-18 (assessment year 2018-19). The FM has also proposed to insert a new section 194-IC in the Income tax Act so as to provide that in case any monetary consideration is payable on or after April 01, 2016, under the JDA, TDS at the rate of 10% shall be deductible from such payment.
The taxation in case of JDA was an area of litigation and big dispute. The amendment will help in putting a curtain on such uncertainty and reduce the litigation.
Relaxation in deemed Notional Rent
Considering the business exigencies in the case of real estate developers, the FM has also proposed to amend section 23 for the manner of determination of annual value of house property and to provide that where the house property consisting of any building and land appurtenant thereto and the flats are held as stock-in-trade and the property or any part of the property is not let during the year, the annual value of such property or part of the property, for the period upto one year from the end of the financial year in which the certificate of completion of constructionof the property is obtained from the competent authority, shall be taken to be nil. This amendment is also practical and will eliminate the bonafide problem of promoters to some extent and will take effect from FY 2017-18 and will apply to assessment year 2018-19. It would have been better not to charge tax on deemed rent on flats held as stock in trade.
Base year for computation of capital gains
The FM has proposed to amend section 55 of the Act so as to provide that the cost of acquisition of an asset acquired before 01.04.2001 shall be allowed to be taken as fair market value as on April 01,2001 and the cost of improvement shall include only those capital expenses which are incurred after 01.04.2001. It will replace the existing date of April 01, 1981. The amended base year will apply in respect of long term capital gains arising in FY 2017-18. It may be noted that for cost of acquisition of the asset the assessee has been allowed an option of either to take the fair market value of the asset as on 01.04.2001or the actual cost of the asset as cost of acquisition. As the base year for computation of capital gains has become more than three decades old, assessees are facing genuine difficulties in computing the capital gains in respect of a capital asset, especially immovable property acquired before 01.04.1981due to non-availability of relevant information for computation of fair market value of such asset as on 01.04.1981. Consequently the benefit of cost inflation index may be claimed at the discretion of the taxpayer on the basis of fair market value as on April 1, 2001 (instead of actual cost in case property was acquired prior thereto). The measure is a step in right direction and will help in ease of doing business.
Promoting Investment in immovable property
The existing provision of the Income-tax Act provides that to qualify for long-term asset, an assessee is required to hold the asset for more than 36 months subject to certain exceptions, for example, the holding period of 24 months has been specified for unlisted shares.With a view to promoting the real-estate sector and to make it more attractive for investment, the FM has proposed to amend section 2(42A) of the Income tax Act so as to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, to qualify as long term capital asset.
This amendment is a welcome measure and will apply to transactions taking place during FY 2017-18.
Expanding the scope of long term bonds under 54EC
The existing provision of section 54EC provides that capital gain to the extent of `50 lakh arising from the transfer of a long-term capital asset shall be exempt if the assessee invests the whole or any part of capital gains in certain specified bonds,within the specified time. Currently, investment in bond issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited is eligible for exemption under section 54EC.
In order to widen the scope of the section for sectors which may raise fund by issue of bonds eligible for exemption, the FM has proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years which hasbeen notified by the Central Government in this behalf shall also be eligible for exemption with effect from April 1, 2017.