The Union Budget for 2014-15 has done a good turn for the
languishing real estate sector that is grappling with unsold inventory of
finished projects and mounting debt. There are two proposals worthy of mention
that will give a much-needed leg-up to the critical sector. First, Finance
Minister Arun Jaitley increased the tax deduction for interest paid on housing
loans by individuals in self-occupied properties from the current Rs.1,50,000 to
Rs.2,00,000 a year. This will lower the burden just that bit for middle-class
tax payers with ongoing housing loan EMIs, and also hopefully push those
considering investing in a house into making that decision. With interest rates
likely to trend down over the next year and real estate prices at a low ebb in
most cities, the higher deduction will be an important incentive for aspiring
home-buyers. More interesting than this concession though is the clarity that
the Budget brings to taxation of real estate investment trusts, or REITS, which
are akin to mutual funds in the stock market.
REITS sell units to investors and use the money to invest in
completed or almost-completed projects, mainly commercial and retail, to earn
rental income. This income is then distributed to unit-holders, and the units
are listed and traded on the stock markets like any other equity share. Mr.
Jaitley has clarified that these units will be taxed in a manner similar to
equity shares; more importantly, he has granted pass-through status to REITS,
which means they don’t have to pay corporate tax. The Budget also clarifies that
the sponsor (promoter) will be liable for capital gains tax not when he
exchanges his shares in the project for units from a trust but when he sells
those units. These proposals are in line with market expectations and will
certainly give a push to REITS, which are important in more ways than one. In
the immediate term, REITS could help unlock for promoters capital invested in
finished but idle projects. In the medium to long term, these trusts will help
capital formation in the real estate business and relieve the financing burden
on banks, which are now stressed with non-performing real estate loans, among
others. REITS will also help domestic investors who cannot invest large sums of
money but wish to have real estate in their portfolio as they can invest in
units that are expected to be priced as low as Rs.1,00,000 to start with, going
by draft guidelines of market regulator SEBI; the guidelines will be finalised
once the Budget is passed by Parliament. Most important of all, the advent of
REITS will usher in global best practices into an industry that is in dire need
of transparency in its business practices.
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