Great Living Engineered

Union Budget 2017 – Key Takeaways for Real Estate Sector

21st February 2017

In our pre budget note we had touched upon the themes of infrastructure, affordable housing and first home. The Prime Minister and his team seem to have considered these as a key focus while preparing the Union Budget 2017. This is in line with their vision of Housing for All by 2022. On a much wider level the Budget didn’t announce radical measures, to prevent any disruption in the economy, still it provided ample allocation to rural and urban growth. The Government discussed about implementation of GST in the coming financial year. We continue to believe GST is one of the biggest measure that will lay strong foundation for Indian economy.  

Considering, Rs. 48,000 crore has been provided for the MNREGA rural employment scheme the Government is trying to strengthen the grassroots. Over and above this there are further measures to boost rural incomes, skilling of youth and disaster relief tools such as insurance. The cornerstone for any strong economy is its infrastructure and this where the NDA government is taking bigger steps. A massive Rs 3,96,135 crore is being allocated for infrastructure development. In the urban centers importance of Metro Rail was recognised and a new Metro Rail policy is on the anvil. Highway, coastal roads, railways & rail safety, railway stations and newer airports all are likely to see construction boost under the current Government. While the Government is pushing for expenditure to propel the economy and lift the rural markets, it has kept a discipline on the fiscal deficit. This would result in lower borrowing costs for private sector and individuals.

The measures thus announced are likely to create more jobs, faster economic growth and stronger fundamentals. These are important pillars that are a key necessity for buoyant demand of real estate in any form – residential, offices or hospitality. We contemplated in our previous note that housing sector has long been seeking status of infrastructure which would enable the developers to bring down their capital costs and thus pass on the benefits to buyers. Union Budget 2017 for the first time accorded the status of infrastructure to affordable housing segment. By setting the limit of 30 sq mt in metros and 60 sq mt in carpet area for affordable houses the Government has widened the scope of housing development in this category. In the last year’s Budget the Government had announced tax benefits to affordable housing but the definition of affordable homes confined the scope to Built Up Area. With the revision in the definition anywhere from 25-35% larger homes will fall in this segment. To top it up the Government extended the income tax benefits to private affordable housing projects which are completed within next 5 years instead of 3. This is in addition to service tax benefits for housing schemes under PPP model with Central or State Governments. However, we await clarity on definition of affordable housing since there may be unit cost constraints too considering RBI has its own way of defining affordable housing.

In a measure that will boost more investor participation in real estate asset class the Government reduced the threshold for long term capital gains classification from 3 years to 2 years. In comparison to trade in listed securities where capital gains over one year qualify as long term and thus beneficial treatment the physical assets were not as much favoured. But this holding period reduction may bring in more investors into the market. Also Indexation for capital gains is revised from 01-04-81 to 01-04-2001, a measure that will benefit real estate investors and developers by reducing their capital gains liabilities.

With the number of measures announced that favour real estate, the Union Budget 2017 would go down as one that will empower and rejuvenate the sector. A relief was announced for land owners who enter into Joint Ventures with real estate companies. From here on their tax liability will be decided on project completion instead of the current norm of computing deemed income at the time of entering such arrangements. This move will boost housing development as more land is likely to be made available for the purpose. The Budget has also reduced liability of taxation on real estate developers who have unsold units even after project completion, any savings on this account will also be passed onto the buyers in these projects. The lower middle class and SMEs have received tax benefits, savings on this account too may find a way into their real estate investments.

A combination of direct as well as indirect measures is likely to benefit the housing development sector especially the affordable housing segment. Indian economy is in an interesting spot as its importance has been growing on the global map. The Budget 2017 is focusing a lot internally through infrastructure, rural and urban development. It is likely to boost employment creation over short to medium term and thus foster demand in real estate. We at Rohan Builders are very optimistic about economic prospects of the country and its positive impact on our sector.