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.
