The real estate sector is the second-largest employer in the economy, after agriculture, and is expected to grow at a 9.2% CAGR from 2023 to 2028, reaching $780.6 billion. As a major contributor to GDP, it plays a significant role in shaping policy decisions, including the Union Budget. With the Union Budget set for February 1, the sector anticipates tax relaxations and other favorable measures, including:
Infrastructure Status
The real estate industry has long sought infrastructure status, which would provide access to low-cost funding, such as Foreign Direct Investment (FDI), external commercial borrowings, and domestic banking support, while reducing the need for collateral. This status would be especially beneficial for integrated township projects that include housing, schools, hospitals, roads, water supply, sanitation, and other civic services, which are eventually transferred to local authorities.
Incentives for Sustainable Real Estate
Promoting green building initiatives is vital to combating climate change. Green buildings conserve resources, reduce environmental impact, and enhance quality of life. To advance these goals, green building incentives should be integrated into the National Building Code, with enforcement and tax benefits for developers adopting sustainable practices.
Green financing is equally crucial. While the government’s “taxonomy for climate finance” is a positive move, it must be complemented by accessible financial products, such as lower interest rates, tax breaks, and subsidies for sustainable materials and energy-efficient systems. The Reserve Bank of India’s inclusion of green building financing in its Priority Sector Lending (PSL) scheme is a promising step.
Although Budget 2024 introduced initiatives like PM Surya Ghar Muft Bijli Yojana, offshore wind energy projects, and a biomanufacturing scheme, stronger enforcement in the real estate sector is needed to drive sustainability more effectively.
Real Estate Investment Trusts (REITs)
Dividend taxation for REIT unit holders depends on the Special Purpose Vehicle’s (SPV) tax regime. Under the lower tax regime specified in Section 115BAA, dividends are taxable for unit holders, whereas under the old tax regime, dividends are exempt.
However, when an SPV under the old tax regime is owned by a Holding Company (Hold Co) operating under the new lower tax regime, doubt arises regarding the exemption of dividends distributed through the Hold Co. To prevent double taxation and align with the intent of exempting dividends taxed at higher corporate rates in the SPV, it is recommended that such exemptions be extended regardless of the Hold Co’s tax regime.
The current practice of taxing dividends at both the SPV and unit-holder levels discourages REITs investment. To address this, unitholders should be exempt from tax on dividends received from SPVs under the lower tax regime.
Foreign Investment
The Centre and states should collaborate to streamline processes and accelerate reforms to attract more FDI in real estate. For instance,clarifying that the ‘real estate activities’ in the negative list of end uses apply solely to the buying and selling of immovable property without development would enable developers to access the external commercial borrowing (ECB) route. Additionally, it should be specified that purchasing immovable property for leasing, even without development or refurbishment, is permitted, as it does not constitute speculation.
Tax on Joint Development Agreements (JDAs)
The Finance Act, 2017, introduced a new sub-section (5A) to Section 45, stating that capital gains from JDAs are taxable in the year the completion certificate is issued by the relevant authority. This rule applies only if the property owner is an individual or Hindu Undivided Family. However, the law does not specify how JDAs are taxed for other taxpayers. Many developers operate as companies, and there is no clear provision addressing taxation of JDAs for these entities.
Tax exemption for homebuyers
Currently, tax benefits are available only after possession, which can take 3-4 years post-loan. These benefits should instead be available from the date the property is booked.
Relief for taxpayers
Employees should receive 100% tax exemption on compensation for houses rented under a leave and license agreement. Providing tax breaks for rental income would encourage more investment in the rental housing market. Additionally, allowing buyers to use proceeds from selling commercial properties to purchase residential properties and reducing long-term capital gains tax to two years would promote a more flexible real estate market.
Non-Resident Indians (NRIs)
Currently, NRIs face a complex process when selling property and repatriating proceeds. Simplifying the rules and providing tax exemptions or breaks on rental income would encourage NRI investment in India. Additionally, rental income taxation should be simplified with a flat rate or tax holiday to support their investments.
Stamp Duty & Local Levies
Reducing stamp duty from 5% to 3% would encourage more transactions and ultimately increase government revenue due to higher transaction values.
The Union Budget presents an opportunity to address critical issues such as infrastructure status, tax reforms, green financing, and foreign investment bottlenecks. By implementing these measures, the government can foster sustainable growth, enhance affordability, and attract both domestic and international investments, ultimately contributing to a more resilient and inclusive real estate market.
The author is a Partner at Shardul Amarchand Mangaldas & Co. Views expressed are personal.
