Budget 2017 and beyond: improving home ownership through better affordability

‘Housing for all’ is a stated goal of the current government. This has been the focus of various initiatives and announcements made over the past couple of years. While a lot has been done, the impending budget is a good opportunity to further advance this agenda through a few simple policy actions.

These actions are with a view to:

- Lower the cost of the property - Lower the monthly installment on the home loan availed by the purchaser - Make property purchase more secure

1. Lowering the cost of property – through lower taxes and transaction costs: After purchasing the property, the buyer has to incur costs, which could go up to 20% of the price of the property. These include VAT, Service Tax, Stamp Duty and Registration among others. These multiple taxes and levies not only add to the cost of the property, but are intrinsically unfair. This is because the basic price that the buyer pays already includes the stamp duty and registration costs incurred by the developer to acquire the land.

The implementation of GST should subsume the VAT and Service Tax under its fold. However, the Stamp Duty and Registration cost structure need to be rationalized..

2. A) Lowering the cost of finance – lower interest rates for borrowers: The Housing Finance industry should be given infrastructure status. This would then open up several new avenues of long term funds. HFIs can issue Infrastructure bonds, which qualify for tax benefits. Further, they can raise funds in the overseas markets through the External Commercial Borrowing (ECB) route. Funds raised in these ways will be cheaper, even after factoring the cost of hedging, thus leading to lower lending rates.

B) Lowering the cost of finance – tax incentives for borrowers: One way to increase affordability is by reducing the effective home loan interest through tax incentives allowed under section 24 of the IT act. This allows for deduction of both principal repayment and interest against the income to reduce the income tax burden for home owners.

The maximum tax deduction, announced by the Vajpayee government in 2001, was Rs 1.5 lac. It was further enhanced to Rs 2 lac only two years ago. Thus, over a period of 16 years, while property prices have trebled, the deduction limit for the interest paid has only increased by Rs 50,000. In other words, this benefit has eroded in real terms. The decrease in tax incentives has adversely impacted the affordability of homes.

There is a strong case for raising the limit to Rs 5 lakhs in the coming budget, so that it keeps pace with inflation and rising property prices. It will also be worthwhile to carve out a separate section for principal repayment, which is currenly under section 80C.

3. Making property purchase more secure – Real Estate Regulation Act The Real Estate Regulation Act (RERA) needs to be implemented immediately. The protection afforded by this piece of legislation will cleanse the housing industry and enhance the confidence with which prospective buyers make their decisions

By Anil Kothuri, President & Head of Retail Finance, Edelweiss