Income Tax 30 Jan,2020
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Expectations related to housing and real estate sector from Budget 2020
Neelam Kumar JainFCA, DISA

1. Preliminary

The real estate sector being one of the most globally recognized sectors play a significant role in the Indian economy as it ranks the second-highest in the world in terms of generating employment in India and contributing to the GDP of the country. The Government of India along with State governments has taken several initiatives and measures to support the growth in the real estate sector such as setting up of an alternative investment fund (AIF), Pradhan Mantri Awas Yojana (Urban), creation of an Affordable Housing Fund (AHF), the Smart City Project and so on. Despite all these efforts and strong measures by the governments, the real estate sector has been facing serious slump and recession and a substantial portion of the population are now sitting unemployed due to such recesion. Considering the challenges faced by the real estate sector in the last couple of years, it is expected that Government may announce a range of budget proposals for benefits of real estate developers/builders as well as small tax payers and homebuyers to revive and boost the real estate industry in the country. These proposals are discussed herein below.

2. Deduction for Interest on housing loan [Section 24 r/w Section 23(2)]

The second proviso to clause (b) of Section 24 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') allow a deduction maximum up to Rs 200000/- for interest payable on capital borrowed for acquisition or construction up to two1 house for own residence (or may not actually occupied due to the reason as referred to in section 23(2)(b) of the Act) in computing the income from house property. Similary the fourth proviso to clause (b) of Section 24 of the Act also restrict the said deduction maximum up to Rs 200000/-.The aforesaid amount of deduction was last raised from Rs. 150000/- to Rs. 200000/- by the Finance Act, 2014. Prices of residential houses had substantially increased across the country during last six years period. It is expected and suggested that the Govt. must increase the said limit by substantial amount to remove the recession in 'real estate sector'.

3. Set off of loss under the head 'Income from House Property [Section 71(3A)]:

Section 71(3A) of the Act restrict set off of a loss under the head "Income from House Property" against any other head of income to the extent the amount of the loss exceeds Rs. two lakh. The said limit of Rs. two lakh for set off of a loss under the head "Income from House Property" is also required to be increase to align with the expected increase as aforesaid in deduction for Interest on housing loan u/s 24.

4. Enhancing limit of capital gain to entitle exemption for investment in two house u/s 54

Any capital gains, arising to an Individual or HUF, from transfer of a long-term capital asset being residential house is exempted to the extent such capital gains is invested in two2 residential houses in India. However if the amount of capital gains exceeds Rs. 2 crores such exemption is available for investment in one residential house only.

It is expected and suggested that the aforesaid amount of capital gain should be increased at suitable level to extend the scope of exemption up to more tax payers and to boost the real estate sector.

Further this section allows such exemption for investment in two residential houses once in a lifetime only. The Govt. may also consider to provide such exemption twice in a lifetime.

5. Expectation Under Section 54EC

Capital Gain on transfer of a long-term capital asset being land or building or both is exempt u/s 54EC to the extent such capital gain is invested in "long-term specified asset" within a period of six months from the date of such transfer. Such exemption is allowed maximum up to Rs. 50 lakh in a financial year. It may be noted that the said limit of Rs.50 lakh has not been changed since from last decade. Considering the recession in infrastructure and real estate sector the government should increase the said limit at appropriate level at least up to Rs. one crore. It is also suggested that the time limit for investment in long-term specified asset should also be changed so as to allow up to the six months or the due date of filing return u/s 139, which ever is later.

Meaning of "Long-term specified asset" has been defined in sub-clause (ii) of clause (ba) of the Explanation to Section 54EC (3) of the Act as follows:

"long-term specified asset" for making any investment under this section on or after the 1st day of April, 2018 means any bond, redeemable after five years and issued on or after the 1st day of April, 2018 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956), or any other bond notified in the Official Gazette by the Central Government in this behalf.

6. Anomaly in section 54F required to be clarified

Section 54F of the Income Tax Act, 1961 grant exemption to an individual or HUF from charging tax on capital gain arising from transfer of any long-term capital asset other than a residential house if the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India (hereafter in this section referred to as the new asset). Further such exemption is granted in proportion to the amount of net consideration invested in such new asset.

Sub-clause (ii) to clause (a) of proviso to sub-section (1) of Section 54F provides that nothing contained in this sub-section (i.e. sub-section 1) shall apply where the assessee purchases any other residential house (other than the new asset) within a period of one year after the date of the transfer.

Whereas sub-section (2) provides that where the assessee purchases any other residential house within the period of two years after the date of the transfer, the amount of capital gain exempted earlier as aforesaid shall be deemed to be long-term capital gain chargeable to tax for the previous year in which such other residential house is purchased.

Carefully reading of the aforesaid provision show an anomaly which can be understood by way of following example:

Suppose an individual has a long-term asset (other than residential property) and he sells it on 1st March, 2019 at Rs. 15,00,000/-. Suppose the indexed cost of the asset is Rs. 800000/- then:

The Long Term Capital Gain arises = 1500000 - 800000 = Rs. 700000/-

He purchases a residential house (New asset) at Rs. 1500000 on 15th May, 2019 so as to avail full exemption u/s 54F in the A.Y. 2019-2020.

Now suppose he purchase another residential house at Rs. 500000/- on 15th January, 2020 (i.e. within one year of the transfer).

Now following situations/consequences may arise:

(i)  According to sub-clause (ii) to clause (a) of the proviso to section 54F(1), he is not entitled for any exemption u/s 54F in the A.Y. 2019-2020.

(ii)  In contrary as per sub-section (2) the amount of capital gain claimed as exempted u/s 54F on account of investment in residential house property (new asset) shall be deemed to be long-term capital gain chargeable to tax for the previous year in which such other residential house is purchased i.e. the assessment year 2020-2021.

(iii) Further suppose assessee had filed return for the assessment year 2019-2020 by the due date i.e. 31st July, 2019 by claiming exemption u/s 54F. Now whether he is required to file a revised return for the A.Y. 2019-2020 on purchase of another residential house in order to follow the provision contained in sub-clause (ii) to clause (a) of the proviso to section 54F(1) or whether he should proceeds according to sub-section (2) i.e. amount of capital gain claimed as exemption u/s 54F in the A.Y. 2019-2020 offered back as long-term capital gain chargeable to tax for the A.Y. 2020-2021.

In view of aforesaid discussion it is expected that the Govt. may make suitable amendments in section 54F to remove the aforesaid ambiguity.

7. Higher exemption of HRA required to extend some more cities

At present HRA is exempted under section 10(13A) r/w Rule 2A of Income Tax Rules, 1962 as follows: -

(i)  Actual amount of such HRA received for the relevant period.

(ii) The amount by which the actual rent incurred by the assessee for residential accommodation occupied by him exceeds one-tenth (10%) of the salary due to the assessee for the relevant period.

(iii) An amount equal to—

(a)  50% of the salary due to the assessee for the relevant period if the accommodation is situate at Mumbai, Kolkata, Delhi or Chennai; and

(b)  40% of the salary due to the assessee for the relevant period if the accommodation is situate at any other place,

Whichever is the least.

From the above it can be seen that a higher exemption/deductions is allowed if the accommodation of the assessee is situated at Mumbai, Kolkata, Delhi or Chennai. However the prices and rental charges for houses in cities like Bengaluru, Hyderabad, Noida, Gurgaon etc. are also very high. Accordingly the aforesaid higher deduction/exemption should also be extended to such other metro cities.

Meaning of 'salary' and 'relevant period'

  i.  'Salary' includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

 ii.  'Relevant period' means the period during which the said accommodation was occupied by the assessee during the previous year..

8. Increasing the tolerance limit from 5% to 10% in section 50C, 43CA & 56(2)(x) of the Act

Certain sections like 50C, 43CA, 56(2)(x) etc. of the Act provides a deeming fiction under which consideration received or accruing as a result of transfer of an immovable property is less than the value adopted or assessed or assessable by the Stamp Valuation Authority (SVA) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purpose of computing profits and gain or capital gains or income from such transfer. However such deeming fiction is not applied where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of such transfer.

It is expected and suggested that the Govt. may increase the said tolerance limit from 5% to 10% to reduce the practical hardship of the taxpayer.

9. Increase in deduction limit under Section 80C:

Section 80C of the Act provides deduction in computing the total income of an assessee being an individual or a HUF for specified payments/deposits/contribution such as PPF, fixed deposits, housing loan repayment, insurance premium, expenditure made towards tuition fees, Equity Oriented Mutual funds, National Savings Certificate, Senior Citizens Saving Scheme etc. The maximum deduction allowed under this Section is Rs. 150000/-. The said deduction limit was last increased from Rs 100,000 to Rs 150,000 in the Budget 2014 and considering the present circumstances it is very low. To encourage common mans towards savings and investments and channelise their savings into the real estate sector and capital markets, extention of said deduction limits is the need of the hour. It is expected that the honorable Finance Minister Nirmala Sitaraman may enhance the said limit from Rs. 150000/- to Rs 300,000/-. Similary the limit of contribution to PPF a/c may also be increased.

10. Deduction in respect of subscription to long-term infrastructure bonds (Section 80CCF)

An individual or a Huf was earlier allowed a deduction u/s 80CCF for investment in notified long term infrastructure bonds, to the extent of Rs. 20,000 for a Financial Year. This deduction was available for F.Y. 2010-11 and 2011-12 and thereafter this has been withdrawn. It is suggested that the government should reintroduce this deduction for investment in such infrastructure bonds at least up to Rs 50,000. This would encourage the taxpayer to invest in such bonds and government would also get funds to meet the public welfare expenditure and boost the economy of the country.

11. Aggregate limit for deduction u/s 80CCE

At present the aggregate amount of deduction under Section 80C, Section 80CCC and sub-section (1) of Section 80CCD can be allowed maximum up to Rs. 150000/-. [Refer Section 80CCE of the Act]. This was last enhanced by Rs. 50000/- to Rs. 150000/- w.e.f.1-4.2015. It is expected that the Govt. may increase the said amount of aggregate deductions.

12. Deduction under Section 80EEA

The deduction under this section to an individual in computing the total income is allowed up to Rs. 150000/- for interest payable on loan taken from a financial institution for acquisition of a residential house property subject to satisfying the following condition:-

(i)  The loan should be sanctioned during the period from 1-4-2019 to 31-03-2020.

(ii)  The Stamp duty value of residential house property should not exceed Rs 45 lakh.

(iii) The assessee being individual taxpayer should not own any residential house property on the date of sanction of the loan.

The deadline of loan sanction should be extended for further period at least 2 years to entitle deduction u/s 80EEA. Further the deduction is allowed in reference to the acquisition of a residential house property. It is suggested that this section should be amended so as to allow deduction for interest on loan taken for the purpose of construction too. Further cap of stamp duty value of Rs 45 lakh also required to be increased at suitable level considering the prices of residential houses in metro cities.

It may be noted that maximum deduction under this section is allowed up to Rs. 150000/- and this is also subject to condition that individual taxpayer does not own any residential house property on the date of sanction of the loan.

13. Extension of sunset clause for Housing Projects u/s 80-IBA

The Finance Act 2016 introduced Section 80-IBA whihc provides deduction to the assessees engaged in the business of developing and building housing project. Deduction of an amount equal to 100% of profits derived from such business is available to the assessee provided inter-alia the housing project is approved by the competent authority after June 01, 2016 but on or before March 31, 2020. It is expected that the government may extend this period by two years from March 31, 2020 to March 31, 2022 to achieve the biggest goal of providing 'Housing for all' on time.

14. Conclusion

Small taxpayers, business man, trade industries etc. are hopeful that the upcoming union budget 2020 will bring some tax friendly measures with income tax cut and incentives to spend money whereas other side the government is facing problem of low tax collections and fiscal deficit. The Indian economy is also in its worst situation. It would be interesting to look how the same is managed with the fiscal deficit.

References:

 1.  Deduction up to two houses increased by the Finance Act, 2019

 2.  Exemption up to two houses increased by the Finance Act, 2019