How the 2020 budget can boost India's real estate sector

30 January 2020 3 min. read

EY has chimed in with its budget recommendations as the Union Budget draws closer. In an article in the Economic Times, the Big Four accounting and advisory firm recommends a variety of tax provisions to ease the burden on homeowners across India.

The article, written by Tax Partner at the firm Shalini Jain, presents the tax recommendations as a much needed respite for India’s real estate sector. The government of India has committed to ‘housing for all’ by 2022, although heavy taxation faced by homeowners is currently posing key obstacles to the realisation of this scenario.

The government has realised the importance of the real estate sector for India’s overall economic development, and has devised a number of policies that are favourable to growth in the sector. Part of this drive has been the decision to ease regulations around real estate development.

Jain suggests that the government gives more weight to this drive by making more financial room for homeowners, primarily through two specific policy changes. An “increase in standard deduction” and an “increase in deduction for interest on housing loans,” according to Jain, will be beneficial for the market.

How the 2020 budget can boost India's real estate sector

Explaining the former, Jain writes, “As per the provisions of the Income-tax Act, 1961, in the case of a rented house property, the net annual value of the house property is calculated by deducting the amount of municipal taxes paid from the gross rental value (usually the rental income, subject to exceptions). From the net annual value, a standard deduction of 30 per cent is allowed towards repairs and maintenance costs of the house (irrespective of actual spend), along with a deduction for interest paid on housing loan, while determining the taxable income from the house property.” 

The rate of standard deduction has been at 30% for nearly two decades now, which has posed challenges in light of inflation and other market trends such as rising prices in providing utilities and maintenance. She recommends an increase in this deduction to 50%.

Interest payments

The second policy measure relates to deduction for interest rates on a housing loan. “Interest on housing loan can be claimed as a deduction while computing the taxable income. The deduction is limited to Rs 2 lakh for self-occupied house property, subject to underlying conditions, whereas there is no upper limit on the amount of interest that can be claimed as deduction for let-out house property,” wrote Jain.

However, conditions on these deductions in many cases leads to a situation where the benefit for the taxpayer is entirely nullified. Jain suggests that borrowers be given more room by increasing the upper limit of deductions to Rs. 5 lakh.

Both these measures are, according to Jain, likely to reinvigorate the housing market by making it attractive for investment, in light of a dip in its appeal over recent years.

Previously, tax partners from other Big Four accounting and advisory firms also cast their views on the budget discussions. Deloitte partner Ashutosh Dikshit suggested that the government should lower its collection targets in light of the major corporate tax cuts late last year. KPMG, meanwhile, expects the latest budget statement to bring clarity on how to manage the new corporate tax paradigm.