By Sanket Dhanorkar, ET Bureau|May 22, 2017, 11.01 AM IST | Economic Times
A roof over your head is a basic necessity, but if you spend too much of your income on shelter alone, you should be concerned. A big home loan EMI can render you “house poor”—a peculiar situation where the individual owns expensive real estate but has no money left for other expenses after paying the EMI. This week’s cover story focuses on the pitfalls of overinvesting in a house. We also tell you how to maintain a healthy balance between housing and other critical goals.
The downside of buying
One of the main reasons why family budgets go haywire is delay in getting possession of homes. The double burdens of EMIs and rent can be too costly. Mumbai-based businessman Chintan Valia, 33, should know. Valia booked a flat worth Rs 35 lakh back in 2009. As the builder was a reputed one, Valia was confident that the property would appreciate in value, allowing him to make a neat profit by selling it a few years down the line. He is yet to get pos ..
Chintan Valia, 33, Businessman, Mumbai
Bought a flat worth Rs 35 lakh on loan in 2009, but is yet to get possession. He is paying an EMI of Rs 15,000 and Rs 20,000 in rent. His monthly income is Rs 85,000.
Housing cost as percentage of income: 41%
THE WAY OUT
Sell the property as soon as construction is completed.
“The cost hurts. Very little is left for savings after catering to household expenses,” rues Valia. His story is hardly unique. There are thousands sailing in the same boat. The typical Indian who made a huge financial commitment while buying a dream home only to have it become a millstone around his neck. Even those who have got possession are finding it tough to service the home loans. These people own houses worth Rs 60-70 lakh, but after their EMI is paid, they have little money for other expenses.
Too often, lulled into a false sense of security, many home-buyers make the longterm financial commitment without factoring in the costs that come with the purchase. The home loan EMI is only a part. Society maintenance charges, home insurance premium, cost of décor and property tax can collectively make a big dent in a household’s finances. After shelling out these payments, many are left with hardly any money, ending up compromising on key goals. Turn to page 7 to know if you are paying more than you can afford.
With home loan interest rates at multi-year lows, advertisements are exhorting homebuyers to make a move. “This is the best time to buy a house,” chorus lenders and housing developers alike. It’s hard to resist the bait. At 8.4% rate of interest offered by a leading public sector lender, the EMI on a Rs 50 lakh home loan for 20 years now stands at Rs 43,075, as against Rs 48,251 at 10% three years ago. However, this luxury of low EMI will only be fleeting. “You are not locking in at the current low rate for the entire tenure of the loan. The lender will revise the interest rate upwards when the broader rates start inching up,” cautions Jayashree Kurup, Head of Content and Research, Magicbricks. Besides, the benign mortgage rates completely mask the fact that the price of the homes itself continues to remain beyond the average homebuyer’s budget.
Often, homebuyers build in certain expectations of how their income will grow over the years or how the value of the house will appreciate to build the foundation on which they commit to high-ticket loans even if current circumstances do not favour such an outflow. Ritesh Brahmbhatt, 34, from Mumbai, is banking on a better future earning profile to ease the burden he faces today owing to a hefty home loan. Brahmbhatt, along with his wife, is currently paying off two housing loans entailing a combined EMI outflow of Rs 72,000. He bought his first house for Rs 25 lakh nine years ago, but decided to opt for another under-construction flat worth Rs 74 lakh closer to his workplace a few years back. While the couple’s monthly income is around Rs 1.5 lakh, a household expenditure of around Rs 30,000 along with other annual commitments of around Rs 25,000 on property tax and insurance premium leaves them with meagre savings. However, Brahmbhatt argument is that while he feels the pinch of the high outflow now, he has the benefit of age on his side to overcome the difficulty. “I took a chance and opted to build assets at an early age that could provide me with a security blanket in future. I am banking on my own ability to do well and prosper in my career to support the high payout,” he insists. He is also confident that should he need to, he would be able to sell one of his properties at a good price.
Ritesh Brahmbhatt, 34, Banker, Mumbai
Paying EMIs on two housing loans. He invested in property banking on future income growth. While he earns Rs 1.5 lakh a month, Rs 72,000 goes towards loan repayment.
Housing cost as percentage of income: 48%
THE WAY OUT
Liquidate one flat to ease burden on finances and use funds to invest in higher yielding assets. Try to prepay loan using any surplus.
However, homebuyers would do well not to be so confident of being able to sell their poperty should they need to. Property is not a very liquid asset. It usually takes a lot of time for sellers to find a buyer and realise the value of their asset. The prevailing housing market serves as a cautionary tale. The secondary or resale market has been hit hard by the demonetisation exercise. Many homeowners like Valia, who purchased a house as an investment, are stuck with an illiquid asset. With home sales muted, developers continue to face severe cash crunch, forcing many to abandon projects mid-way. “The risk of delay has killed the market for investors and made it highly illiquid. Homebuyers should ideally look for completed projects instead of taking on the risk of a delay in construction,” says Kurup. While the Real Estate (Regulation and Development) Act (RERA) is expected to provide better protection for the homebuyer, there remains a degree of uncertainty on how effectively and uniformly it will be implemented across states. Besides, while house prices can appreciate a lot over the years, there can be periods or regional pockets where home values can remain stagnant or even witness a decline.
Also, one doesn’t become house poor overnight. It can happen gradually as your personal situation changes. Perhaps at the outset you are able to pay off the high EMIs, but you may end up house poor if your circumstances change. For instance, what if one partner is left jobless for an extended period of time? The current trend of mass layoffs across sectors should serve as a warning to anyone projecting sustained higher income into the future. The salaried class is also witnessing lower increment“It is prudent to base the home buying decision on current income profile rather than making assumptions about the future,” warns Amol Joshi, Founder, PlanRupee Investment Services. Likewise, if one partner decides to stay home after having children, or after the birth of the second child, housing payments can become a greater burden than what it may appear today.
Bigger is not always better
Homeowners may end up being house poor if they insist on buying more space than they really need. “Many homebuyers are biting off more than they can chew,” says Joshi. Most insist on buying a home that would continue to cater to their needs 15-20 years down the line, such as when the family grows larger. So even if a 1-BHK is an appropriate fit today, there is a tendency to opt instead for a 2 or even 3-BHK. This approach leads most to over-leverage. It is critical that buyers evaluate their requirements carefully. Do not stretch yourself to the limit just to own a bigger house. “Buy for today’s needs,” exhorts Kurup. “Opt for a smaller unit today. You can consider shifting to a larger unit a few years later when you have an idea about your actual requirements and possibly have a better grip on your finances,” she adds. Besides, purchasing a bigger house or one in a better locality will not only carry a higher purchase value, it is also likely to set the tone for higher future home related expenses that come with maintaining a certain lifestyle.
Most experts insist that the home loan EMI should not exceed 40% of the monthly income. Anyone spending more than that faces the real possibility of being house poor. The lower the percentage of income that goes toward housing costs, the more breathing room you will have to be able to handle any cash crunch that may arise owing to changes in your life, such as the birth of a child, an extended illness or a layoff. When setting the percentage you’re comfortable with for a housing budget, be sure to account for ancillary costs—property and water taxes, home insurance, maintenance charges etc.
Further, do not get enticed into opting for a large home loan for the tax benefits it can provide. While it can reduce your taxable income substantially and in some cases, even bring you to a lower tax slab, these deductions are only eligible for homes that are fully constructed. Tax exemption for property that is under construction is very limited. Besides, recent tweaks in the tax rules have taken away much of the tax relief for aspirants for second homes. The maximum deduction on interest payment towards home loan is now capped at Rs 2 lakh as against the entire interest that was tax-deductible earlier. “The decision to purchase a home should never be based on tax benefits it can bring,” warns Brijesh Parnami, ED & CEO, Essel Finance Wealth Zone.
Renting not a waste of money
Another fallacy that pushes people to buy a home they cannot really afford is the argument that paying rent is a waste of money. Experts say it makes more sense for prospective homebuyers to stay on rent rather than commit to a high-ticket purchase. “Buying property simply to save on the rent has put many under severe stress,” points out Suresh Sadagopan, Founder, Ladder 7 Financial Services. “It may be a better idea to stay on rent for the time being and invest the balance in a high-yield investment that can allow you to build savings so that you are in a better position to afford that house later.” Investing the savings on EMI through a SIP in an equity the house for at least another five years.
Renting may be the smarter option particularly in some cities where the home value-to-rental value ratio is very high (See table). The Arthayantra Buy vs Rent Report 2017 suggests that in cities like Mumbai, Delhi, Bengaluru and Chennai, anyone with yearly income less than Rs 25 lakh, Rs 16 lakh, Rs 12 lakh and Rs 16 lakh respectively, would be better off renting than buying.
Cost to rent compared with cost to buy should influence buying call
While it makes more sense to rent a home in Mumbai, the urgency-to-buy ratio suggests in Hyderabad, it is prudent to buy rather than rent a home.
Cost to rent includes sum of rent and maintenance charges
Cost to buy includes EMI and maintenance charges
The Urgency-to-Buy (UTB) ranking helps to decide whether you should buy or rent in a particular city. The UTB ratio indicates what extra payment one has to pay every month if the property is purchased instead of rented. The average monthly cost of renting is derived from the sum of rents and maintenance cost whereas monthly cost of buying is calculated by adding maintenance cost with the EMI.
Source: ArthaYantra Buy vs Rent Report 2017
Avoid a cash crunch
If you are still intent on buying that house and committing to a large EMI outflow, there are some things you should put in place at the outset, insist planners. First, build up an adequate contingency fund— equivalent to six months of EMIs—that you can dip into in case there is some interruption in your normal cash flow. Put this amount in a liquid fund. This will act as a buffer till the time your cash flow situation improves. If you haven’t already done so, take adequate health and life insurance cover to provide added protection to your finances. While many lenders offer bundled term insurance cover, do not feel compelled to opt for this. Take a separate term insurance cover instead. Most home loan insurance plans come with a reducing cover, where the quantum of cover is linked to your outstanding loan amount, so the sum assured reduces over time as the loan is being repaid. On the other hand, term plans offer a fixed sum—the beneficiary is entitled to the full amount irrespective at which point of the loan tenure the claim is made. The borrower’s family can use this pay-out to settle the outstanding loan amount with the lender and the balance, if any, can be utilised as deemed fit. Arun Ramamurthy, Co-founder, Credit Sudhaar, suggests homebuyers take a job-loss insurance policy, along with the term insurance. “In the event you are unable to service the loan for an extended period owing to an accident or job loss, the policy will cover the EMI for a specified time,” he says.
For some, the cash crunch can be severe if they are dealing with multiple loans. Take for instance the case of Nirdesh Jain, 28, a chartered accountant from Pune. Apart from a home loan EMI of Rs 21,000, Jain pays a car loan EMI of Rs 10,000 and a personal loan EMI of Rs 5,000. Together, the EMIs eat up 3/5th of his Rs 60,000 monthly income. Jain finds himself trapped in a vortex of short-term personal loans to tide over this crisis. . For such borrowers, consolidating the multiple loans into a single loan via balance transfer can provide some relief, suggests Parnami. “By consolidating the high cost loans into a lower cost loan over a longer tenure, the principal value of the loans will get amortised over many years, which will reduce overall EMI burden and improve cash flow,” he says. Even if you are on a single high-ticket home loan that bears a high interest rate, you should consider switching to a lower interest rate loan, particularly in light of the recent sharp cut in borrowing rates. As a rule, if the rate of interest payable on your home loan is 1% more than the rate on offer in the market, you should consider refinancing the loan.
Nirdesh Jain, 28, Business analyst, Pune
Has multiple loan commitments. As much as Rs 36,000 of his monthly income of Rs 60,000 goes towards paying off a car, personal and home loans.
Loan burden as percentage of income: 60%
THE WAY OUT
Repay costlier car and personal loans at the earliest or take top-up on existing home loan and consolidate other loans into a single low-cost loan.
Is it better to rent or to buy?
The cash flow of a household has to be kept in mind while deciding to rent or buy.
Figures indicate Arthayantra Buy vs Rent Score.
Source: Arthayantra Buy vs Rent Report 2017
Know when to sell
In the absolute worst case scenario, it would be prudent for the homeowner to cut the cord rather than dig a deeper hole. If you are under severe stress owing to housing related payments, consider selling the house and moving into a smaller, more affordable home. While you may not be in a position to enhance your income to support the payments, you can definitely get rid of a payment that is too large for your budget. “If you have exhausted all other options and are staring at a bleak situation where you are unlikely to make ends meet, it is better to cut your losses and let go of the property,” insists Ramamurthy.
With interest rate-cuts and increased liquidity with banks following the demonetisation, loan products have more accessible.
Adhil Shetty | Published: May 11, 2017 4:02 PM | Financial Express
Consumers with healthy credit scores today would be receiving loan offers aplenty. With interest rate-cuts and increased liquidity with banks following the demonetisation, loan products have more accessible. Yet availing a home loan for the very first time remains a complex experience that loan seekers view with trepidation.
There are often misconceptions about what a home loan can do, and what it costs. For instance, you may be of the belief that the loan granted will match the property price. That is untrue, as financial establishments expect you to pay the margin amount.
The margin amount is another term for down payment for your new home. It could be anything between 15% and 20% of the home’s net value. For a first time home buyer, it is no easy task raising this money.
Here are some ways to help.
1. Strategic savings
Nothing beats strategic savings and for this you need to start your planning early. It involves you visualizing your long-term fund needs—including the need to buy a home—and beginning to save and invest accordingly. Begin with simple and accessible investment tools such as mutual funds or recurring deposits. Slowly and surely, you’ll be able to build your deposit over time. You can be efficient at this by locking in your savings at the start of the month. The earlier you start, the sooner you build this fund for your down payment.
2. Take loans but exercise restraint
There could be a situation where you are in urgent need of funds for the down payment. You could consider taking a personal loan to meet the need. Yet, you need to do this in a controlled manner. Having an existing loan will reduce your ability to take on, and repay, additional loans such as a home loan. You would find your finances stretched as you attempt to pay two EMIs at once. This isn’t an ideal situation to be in and is recipe for a financial disaster, in case you were to temporarily lose your ability to generate income. Therefore any loans for down payments need to be taken thoughtfully, and settled as soon as possible to reduce monthly EMI liabilities.
3. Mortgage another property
If you are confident that your current income can take care of EMIs of more than one loan, you could consider a loan against property. You can claim this loan against several options. For example, an existing property or home could be mortgaged. You could also claim it against assets such as shares, jewelry, PPF account, and LIC policies. There also exists the option of taking a loan against rent.
4. Withdraw from your PF account
As per the new EPFO norms, you are now allowed to withdraw up to 90% of your EPF corpus. Not just that, you could also withdraw from this corpus to pay for your EMIs. This scheme was recently implemented keeping in line with the Housing For All initiative of the central government. A word of caution: your PF corpus is meant to help you generate a pension income in retirement, so if you intend to redeem it for a property purchase, you must replenish it soon, or create a backup pension fund to meet your future needs.
5. Deferred down payment
You have the option of requesting a deferred down payment when purchasing a house from a well-known property developer. Under this, you will have the choice of dividing the down payment into multiple instalments. These instalments can be paid over a jointly agreed period of time. Let us say that you have to make a down payment of Rs. 10 lakh. Ask the builder for a time frame of five months to pay Rs. 2 lakh per month.
6. Liquidate your investments
Before you decide to make a property purchase, take stock of your savings, investments and assets. Anything from a vehicle to a part of a property you own can be liquidated for a down payment. Bank deposits, gold, mutual funds, shares etc. can be disposed. This should be carefully done so as to not disturb other financial objectives.
7. Approach an NBFC/ HFC
Non-Banking Financial Companies (NBFCs) and House Finance Companies (HFCs) provide loans that can help you cover a larger part of your fund requirement. For example, they may provide a loan to cover your registration and home repair costs as well. The entitlement of the loan, of course, will be calculated on the basis of your ability to repay.
Always remember to not act in a hurry. Think long and wise about the route you are taking to raise the down payment for your house. It is also advisable to wait and let an offer go if you cannot make the down payment, as there will always be another good offer in the future.
(The writer is CEO, BankBazaar.com)
Source : https://goo.gl/8ixiEW
By Preeti Motiani | ECONOMICTIMES.COM | May 11, 2017, 10.55 AM IST
The Union budget of 2017 brought mixed bundle of joy for the taxpayers. While the section 80EE was re-introduced, holding period was lowered which brought cheers for the taxpayers, on the other hand, the individuals claiming a loss on the let out property or deemed to be let out property were left in shock.
Many of you who already own a second house or looking to buy a new house might give a look at the rules listed below to receive the often missed benefits.
1. You can claim tax benefit on interest paid even if you missed an EMI.
Section 24 of the I-T act mentions the word interest payment “payable” on housing loan. It means that even if you have missed the EMI payment in a year you can still claim the tax benefit on it. It can be claimed as a deduction so long as the interest liability is there.
Kuldip Kumar, Partner and Leader – Personal Tax, PWC says, “One should retain the copy of the interest certificate issued by the lender i.e. bank or NBFC specifying the amount of loan, interest due etc. as this will help in case of any questioning from the tax department.”
The principal repayment deduction under Section 80C, however, is available only on actual repayments.
2. Principal repayment tax benefit is reversed if you sell before 5 years.
While the finance minister may have provided a relief by reducing the holding period to 24 months to qualify for the long-term capital gains but if you sell a house within five years from the date of purchase, or, five years from the date of taking the home loan, the tax benefit gets reversed.
“The deduction claimed will be added back to the income of the taxpayer in the year in which the property is sold,” says Archit Gupta, founder, Cleartax.com
However, the loan amortisation calculations are such that the repayment schedule has lower component of principal repayment in the initial years of the home loan and the tax reversal rule only applies to Section 80C. Also, the benefit of lowered holding period for capital gains will apply from April 1, 2018, AY only.
3. You are eligible for tax break only when you are a co-borrower and co-owner.
You cannot claim a tax break on a home loan even if you may be the one who is paying the EMI. For instance, there may be a situation when you’re paying the EMI of a home loan for the property which is owned by your parents or spouse.
“However, when the house is in the joint name and funded by both the spouses by a way of housing loan, both husband and wife can avail the separate deduction for the interest payments and principal repayment of such loan,” says Kumar.
Even if you own a property with your spouse, you can’t claim deductions if your name’s not on the loan book as a co-borrower.
4. You can claim pre-construction period interest for up to 5 years.
Any interest paid on the borrowing during the construction of a house is eligible for tax relief only after you have received the completion certificate.
“Interest paid during the construction period can be claimed as a tax deduction in five equal instalments starting from the year in which construction of the property is completed. The total tax benefit will be annual interest payable + 1/5th of the pre-construction period “says Gupta.
While filing returns for the AY 2017-18, the maximum limit for the self-occupied property is Rs 2 lakh. In the case of let out property, there is no limit.
The union budget 2017 has removed this anomaly and put the cap of Rs 2 lakh on the let out property. The same will be effective while filing the returns for next year i.e. 2018-19.
5. Re-introduction of the Section 80EE
To provide an additional relief to the homebuyers, the section 80EE has been reintroduced with effect from April 1, 2017. The maximum deduction available has been reduced from earlier of Rs 1 lakh to Rs 50,000 now.
However, this deduction comes with certain restrictions which need to be satisfied while availing this deduction. The conditions are:
a) The home-owner/s should be first time buyer even if the property is bought in the joint ownership,
b) The loan value must not exceed Rs 35 lakh and property value should not exceed Rs 50 lakh, and
c) The loan must be sanctioned by a financial institution during the period April 1st, 2016 to March 31st, 2017.
Archit Gupta, Founder & CEO, Cleartax.com says, “If the taxpayers are able to meet conditions for both of section 24 and 80EE, their taxable income can be reduced by 2.5 lakhs in FY 2016-17 return filing.”
6. Processing fee and other charges are tax deductible.
Most taxpayers are unaware that charges related to their loans such as processing fees or prepayment charges qualify for tax deduction. As per law, these charges are considered as interest and therefore deduction on the same can be claimed.
“Section 2(28A) of I-T Act defines interest as interest payable which includes any service fees and other charges in any manner in respect of money borrowed,” says Kumar.
Therefore, it is eligible for deduction under Section 24 against income from house property. Other charges also come under this category but penal charges do not.
Also, any payment made towards stamp duty and registration fees incurred by the individual are also tax deductible as per the section 80C(2) (xviii) (d) of the act.
7. Loans from relatives, friends and employer are eligible for tax deduction.
If you have taken a loan from friends and/or relatives to acquire a house then you can claim a deduction under Section 24 for interest repayment on loans. You can also claim a deduction for money borrowed from individuals for reconstruction and repairs of property.
“A taxpayer would need to obtain a certificate from the relative which would contain the details such as the amount of interest payable, amount of loan taken, specifying the property details for which loan is taken,” says Kumar.
However, one must remember that this rule is only applicable for interest repayment. You cannot avail the tax benefits available on the principal repayment on that part of the loan borrowed from your relatives, friends and employer.
Further, a lender, in this case, your relatives and friends must disclose the interest earned on such transaction while filing their income tax returns.
SBI, the country’s biggest lender is charging zero processing fee on home loan takeover till June 30, 2017.
NDTV Profit Team | Last Updated: May 07, 2017 07:45 (IST) | NDTV Profit
Do you have a Home Loan with any bank or housing finance company at higher interest? If yes, then it may be a good opportunity for you to transfer your existing home loan to State Bank of India, as the country’s biggest lender is charging zero processing fee on home loan takeover till June 30, 2017. Even you can get higher than the amount currently outstanding in your home loan from SBI if you match their eligibility criteria, the state-owned lender said in its website.
Here are the details you need to know:
Home Loan can be taken over from the following Institutions:
Scheduled Commercial Banks (SCBs),Private and Foreign Banks, Housing Finance Companies (HFCs) registered with National Housing Bank (NHB), Borrower’s employers if they are Central/State Governments or their undertakings or Public Sector Undertakings.
The borrower should have serviced interest and/or installment of the existing loan regularly, as per the original terms of sanction.
The borrower should have valid documents evidencing the title to the house/flat.
Whether take over with sanction of Higher Loan Amount & extended Repayment Period is possible?
Yes. Based on the merits of the case and requirements/ eligibility of the borrower, the Bank may sanction an amount higher than the amount taken over from other bank/ financial institution for purposes of renovation/ extension/ furnishings. Similarly extended repayment period may be sanctioned provided that at all times the criteria regarding maximum permissible finance and security margin under the Bank’s scheme are not diluted.
What is the procedure for Take Over?
The borrower should address a letter to the bank/ financial institution from whom he has availed the loan asking them to deliver, immediately upon receipt of the loan amount, the title deeds and other securities, if any, direct to our lending branch;
The borrower should give to the branch a request letter for paying to his existing lending bank/financial institution the outstanding amount of his loan by debit to his loan account.
The borrower must give an advice of the actual outstandings (with up-to-date interest) in the loan account from the other bank/ financial institutions; the statement of Account for the entire period of loan or for the last 10/12 months where the loan has run for a longer period;
Confirmation letter from the financing Bank that they have created an equitable mortgage over the property.
Documents required for availing the loan:
Disbursal must be effected only subject to the above information being found satisfactory and completion of formalities as regards
Agreement to create Mortgage, Power of Attorney in the favor of the Bank authorizing the Bank to create equitable mortgage on the borrower’s behalf.
Interim security (Ex: Bank Deposit Receipts, LIC Policies, etc) and the security obtained in the interim period will be released after receipt of the title deeds then the other Bank and creation of a valid equitable mortgage subsequent to verification of the borrower’s title to the property.
Whether pre-payment penalty is funded?
Yes. Total loan quantum, will however, continue to be determined by eligibility criteria based on income, EMI/NMI ratio, LTV ratio etc. applicable to Home Loans scheme.
Whether takeover of Home Loan with Top up loan is permitted?
GST, which the government intends to roll out from July 1, 2017, will subsume central excise, service tax and state VAT among other indirect levies on manufactured goods and services
PTI | Updated: March 28, 2017, 18:29 IST | ET Realty
Home loan EMIs of under-construction houses, renting & land leasing to attract GST from July 1. Come July 1 and leasing of land, renting of buildings as well as EMIs paid for purchase of under-construction houses will start attracting the Goods and Services Tax.
Sale of land and buildings will be however out of the purview of GST, the new indirect tax regime. Such transactions will continue to attract the stamp duty, according to the legislations Finance Minister Arun Jaitley introduced in the Lok Sabha yesterday for approval.
Electricity has also been kept out of the GST ambit.
GST, which the government intends to roll out from July 1, 2017, will subsume central excise, service tax and state VAT among other indirect levies on manufactured goods and services.
The Central GST (CGST) bill — one of the four legislations introduced, states that any lease, tenancy, easement, licence to occupy land will be considered as supply of service.
Also, any lease or letting out of the building, including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services as per the CGST bill.
The GST bills provide that sale of land and, sale of building except the sale of under construction building will nether be treated as a supply of goods not a supply of services. Thus GST can’t be levied in those supplies.
‘Goods’ in earlier drafts of the bills were defined as every kind of movable property other than money and securities but includes actionable claim. ‘Services’ were defined as anything other than goods. It was thought that GST may be levied on supply of immovable property such as Land or building apart from levy of stamp duty.
But the bills presented in Parliament have now clarified this position.
Tax experts said that currently service tax is levied on rents paid for commercial and industrial units, although it is exempt for residential units.
Deloitte Haskins Sells LLP Senior Director M S Mani said: “While service tax is applicable at present on sale of under construction apartments, it is levied on a lower value as abatement allowed. The abatement is ostensibly to take care of the value of the land involved in the construction of apartments”.
He said the GST Rules, which will come up for discussion in the Council meeting on March 31, would help ascertain whether a lower rate of GST is proposed for such transactions or whether a similar abatement procedure would be prescribed.
“This would also be dependent on the rate fixation committee which is expected to finalise its recommendations in April,” Mani said.
Experts said service tax is currently levied on payments made for under-construction residential houses after providing abatement, which brings down the effective rate from 18 per cent to around 6 per cent.
“The government is trying its best to make GST litigation free. The bills very clearly specify that GST would be charged on any lease of land or letting out of the building or construction of a complex, building, civil structure or a part thereof, where whole or any part of consideration has been received before issuance of completion certificate or its first occupation,” Nangia & Co Director Rajat Mohan said.
Experts said the GST subsumes central levies like excise and service tax and local levies like VAT, entertainment tax, luxury tax. However, it does not subsume Electricity Duty.
Since the GST Constitution Amendment Act does not provide for subsuming ‘electricity duty’ under GST, it will continue to be levied by the respective state governments.
Certain states like Delhi exempt residential properties from electricity duty but levy it on commercial and industrial units.
Source : https://goo.gl/0mRlKH
Tax experts say that some high net worth individuals, who used to buy properties on loan and were able to set off the full interest liability against the lettable value of property and thus bring down their tax liability substantially, would be particularly hit from this new tax rule.
Written by Surajit Dasgupta | Last Updated: March 28, 2017 09:01 (IST) | NDTV Profit
Interest paid above Rs. 2 lakh on rented properties can be carried forward for 8 years from April 1.
To address the anomaly of interest deduction in respect of let-out property vs self-occupied property, the government has changed income tax rules, which will come into effect from next financial year April 1, 2017 (assessment year 2018-19). In this regard, the government has cut down tax benefits borrowers enjoyed on properties let out on rent. According to current tax laws, for properties rented out, a borrower could deduct the entire interest paid on home loan after adjusting for the rental income. On the other hand, borrowers of self-occupied properties get Rs. 2 lakh deduction on interest repayment on home loan.
However, on rented properties, effective from April 1, interest paid above Rs. 2 lakh can be carried forward for eight assessment years. Since the interest component of home loan repaid in initial years is higher, experts say that the borrower may not be able to fully adjust the interest paid as deduction even in subsequent years.
For example, your interest outgo on a second property is Rs. 5 lakh in a particular year. Assume that you are earning a rent of Rs. 1.5 lakh annually from the property. Such buyers, according to the current rule, are allowed to adjust the difference of Rs. 3.5 lakh (Rs. 5 lakh interest minus Rs. 1.5 lakh). But from the next financial year, they will be allowed deduction of just Rs. 2 lakh. The remaining amount of Rs. 1.5 lakh (Rs. 3.5 lakh minus Rs. 2 lakh) can be carried forward up to eight financial years and be adjusted later.
Tax experts say that some high net worth individuals, who used to buy properties on loan and were able to set off the full interest liability against the lettable value of property and thus bring down their tax liability substantially, would be particularly hit from this new tax rule.
From April another tax rule related to the properties will also change. The new tax rule will help bring down tax liability from property sale. The holding period of a property for qualifying under long-term gains will get reduced to two years, from three years currently. As per current tax norms, if a property is sold within three years of buying, the profit from the transaction is treated as short-term capital gain and is taxed according to the slab rate applicable to him/her. So reducing this time period to two years will bring down tax liability.
Thus, after two years, the transaction will be able to qualify for long-term capital gains, thus lower taxes. Under long-term capital gains on immovable properties, the profit is taxed at 20 per after indexation. Under indexation, inflation during the holding period is taken into account and thus the purchase price is adjusted, reducing the tax burden on the property seller. There are also other benefits for the seller under the long-term capital gains tax. If the gains are invested in some select government investment schemes, the tax liability goes down significantly.
Real estate experts feel that home prices have bottomed out and they are likely to move higher in the new financial year. They say that this could be one of the best times to buy your home since loan rates, too, are attractive.
Sarbajeet K Sen | Source: Moneycontrol.com | Retrieved on 6th Apr 2017
The real estate sector has seen one of the worst times post-demonetisation with sales falling across the country, bringing down home prices. With the financial system having been successfully remonetised to a large extent, what is the outlook for the sector in the coming financial year?
Will activity in the real estate sector pick up 2017-18? Will sales pick up? How will home prices move in the coming fiscal? What will the factors driving real estate be post April 1?
The Confederation of Real Estate Developers Association of India (Credai) is optimistic that the new financial year would be good for the real estate sector and rising sales will lead to home prices moving up.
“The outlook for real estate in 2017-18 is very positive. The recent flurry of reforms and policy initiatives have set the tone for the future growth of the sector. This growth will be driven by efficient implementation of the initiatives and the subsequent rise in demand. We will see the residential sector take center-stage and be the driving force of the sector,” Getamber Anand, President, Credai told Moneycontrol.
Anand says that residential real estate prices have bottomed out and they would move up in coming months. He says those planning to buy homes should finalise the deal now.
“Prices in most markets have bottomed out and stabilised. Imbalance between demand and supply will result in an increase in property prices in the main markets. The recent policy moves have also restored consumer faith in the sector and the fence-sitters are slowly realising the timing is right for a purchase,” Anand said.
He also pointed out the loan rates are some of the lowest now. “With Pradhan Mantri Awas Yojana (PMAY) and the exemptions provided on housing loan in the Income Tax Act, the effective rate of interest for a home loan of about Rs 35 lakhs works out to about 5 percent only which improves the affordability factor and will further elevate the demand in the sector,” Anand said.
Surendra Hiranandani, Chairman & Managing Director, House of Hiranandani, agrees that low loan rates would push demand. “Post-demonetisation, interest rates have been reduced significantly on the back of huge inflows of deposits in the banking system making home loans cheaper. The various reforms undertaken by the government will address concerns faced by home buyers. Increased transparency and credibility will make it more attractive for consumes to invest in real estate,” Hiranandani said.
He also feels that homebuyers should seize the opportunity. “Homebuyers must use this opportunity and invest in properties that are available at attractive prices. They can purchase homes of their choice by full cheque payment. Those looking to buy resale properties can now avail higher finance through banks as the entire payment will happen through cheque,” Hiranandani said.
Hiranandani also feels home prices will move up after the turn of the financial year. “Home prices are expected to pick up in the second quarter of 2017 as the overall economy improves after demonetisation. Also, with Real Estate Regulation and Development Act (RERA), GST and other regulatory changes coming into effect in the coming months there is bound to be better transparency and credibility in the sector.
However, new launches would get impacted due to the implementation of these rules, so the demand for available inventory and ready-to-move-in homes will increase. The rise in demand will ensure that prices will move up again in good quality projects. This is the perfect time to buy a property,” he said.