Real Estate Sector: Key Expectations and Growth Potential
The real estate industry is the second-largest employer in India and is projected to grow significantly over the next few years. With the Union Budget on the horizon, the sector is eagerly awaiting favorable policies, including infrastructure status, tax
Real EstateInfrastructure StatusGreen BuildingReitsTax BenefitsReal EstateJan 30, 2025
It is expected to grow at a compound annual growth rate (CAGR) of 9.2% from 2023 to 2028, reaching a value of $780.6 billion.
As a significant contributor to the GDP, the sector plays a pivotal role in shaping policy decisions, particularly the Union Budget, which is set for February 1.
Infrastructure Status
The real estate industry has long been lobbying for infrastructure status, which would grant it access to low-cost funding sources such as Foreign Direct Investment (FDI), external commercial borrowings, and domestic banking support.
This status would be particularly beneficial for integrated township projects that encompass various amenities like housing, schools, hospitals, and essential civic services.
These projects are eventually handed over to local authorities, ensuring sustainable and well-planned urban development.
Incentives for Sustainable Real Estate
Promoting green building initiatives is crucial in the fight against climate change.
Green buildings conserve resources, minimize environmental impact, and enhance the quality of life.
To further these goals, green building incentives should be integrated into the National Building Code, with clear enforcement and tax benefits for developers who adopt sustainable practices.
While the government's 'taxonomy for climate finance' is a positive step, it needs to 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 development.
Real Estate Investment Trusts (REITs)
The taxation of dividends for REIT unit holders depends on the tax regime of the Special Purpose Vehicle (SPV).
Under the lower tax regime specified in Section 115BAA, dividends are taxable for unit holders.
However, under the old tax regime, dividends are exempt.
When an SPV under the old tax regime is owned by a Holding Company (Hold Co) operating under the new tax regime, there is uncertainty 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 investment in REITs.
Foreign Investment
The central and state governments 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, especially companies.
There is no clear provision addressing the taxation of JDAs for these entities, which can create legal ambiguities.
Tax Exemption for Homebuyers
Currently, tax benefits for homebuyers are available only after possession, which can take 3-4 years post-loan.
These benefits should be extended from the date the property is booked to provide financial relief to homebuyers.
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 the long-term capital gains tax to two years would promote a more flexible real estate market.
Non-Resident Indians (NRIs)
NRIs face a complex process when selling property and repatriating proceeds.
Simplifying these rules and providing tax exemptions or breaks on rental income would encourage NRI investment in India.
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.
Conclusion
The Union Budget presents a golden 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.
Frequently Asked Questions
What is the projected growth rate of the real estate sector in India from 2023 to 2028?
The real estate sector is expected to grow at a compound annual growth rate (CAGR) of 9.2% from 2023 to 2028, reaching a value of $780.6 billion.
Why is infrastructure status important for the real estate sector?
Infrastructure status is crucial for the real estate sector as it provides access to low-cost funding sources such as Foreign Direct Investment (FDI), external commercial borrowings, and domestic banking support, which can significantly benefit integrated township projects.
What are green building incentives and why are they important?
Green building incentives promote sustainable development and help combat climate change. They include tax benefits, lower interest rates, and subsidies for sustainable materials and energy-efficient systems, which conserve resources and reduce environmental impact.
What is the current issue with REITs dividend taxation and how can it be resolved?
Currently, dividends from REITs are taxed at both the SPV and unit-holder levels, which discourages investment. To resolve this, unitholders should be exempt from tax on dividends received from SPVs under the lower tax regime.
How can tax reforms benefit homebuyers and the rental housing market?
Tax reforms such as extending tax benefits from the date the property is booked and providing tax breaks for rental income can provide financial relief to homebuyers and encourage more investment in the rental housing market.
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