How Home Buyers in Kolkata will Benefit Post Union and State Budget 2017

The Finance Minister, Mr. Arun Jaitley have won many hearts when he announced in his Budget Speech 2017-18 that those earning under Rs 5 lakh annually will pay only five percent as the tax to the government as compared to 10 per cent earlier. This single measure will ensure more disposable money in the hands of the people and is likely to boost demand.

But the following three measures announced by Mr. Jaitley in his Budget address have come as some good news for property holders, buyers, and developers.

1. The holding period for availing lower rate of long-term capital gains tax has been reduced from three to two years. This will also bring in more supply in the market. This step will also increase the demand as the investors and homebuyers willing to take advantage of long-term capital gains will be interested in investing in properties as they will be allowed to sell their properties after 2 years instead of 3 years as earlier and avail of the benefit.
2. The base year for computing capital indexation benefit has been tweaked — from the existing April 1, 1981, to April 1, 2001.

How Does Indexation Help?

When you purchase an asset, a part of the rise in the value of the asset can be attributed to inflation.

Suppose Apple was an asset and today you can purchase 1 apple for Rs 100. Let’s say you can purchase 1 apple after 5 years for Rs 130. Apple is same. Just that value of money has eroded in five years.

Same happens to your capital assets too. A part of the rise in the price of the asset will be because of inflation and a part due to wise decision making.

The Government, by letting you index your purchase (acquisition) price, does not penalize you for price appreciation due to inflation.

For instance, you purchase a parcel of land in FY 2006 (August 2005) for Rs 5 lakh and sold it for Rs 12 lakh in FY 2013. Cost inflation index in 2005-2006 was 497 while in 2012-2013 was 939.

Therefore, the indexed cost of acquisition becomes Rs 5 lakh x (939/497) = Rs 10.74 lakh

Long Term Capital Gains = Sales price – Indexed cost of acquisition.

Long Term Capital Gains = Rs 12 lakh – Rs 10.74 lakh = Rs 1.26 lakh

Long Term Capital Gain Tax = 20% of 1.26 lakh = Rs 25,125 (before cess and surcharge)

In absence of allowance for indexation, your capital gain would have been Rs 7 lakh and your long term capital gains tax liability would have been Rs 1.4 lakh.

Not difficult to see that indexation benefit has saved you a lot of tax.

Do note that indexation benefit is available to long term capital gains. No such facility for short term capital gains is available.

These come as a welcome change and will provide relief to tax payers, earning profits from sale of an immovable property; these could trigger investment flow, too.

Affordable Housing Sector Gets Infrastructure Status

In a move to provide required boost to the affordable housing segment, the Central Government granted infrastructure status to the affordable housing schemes in the country. This will allow the developers to enjoy the associated benefits.

The new policy will allow the developers to avail of cheaper loans and will help them to offer economical dwelling units to the mass market. They will also now have more time of up to 5 years as against 3 years to complete their projects.

Under the budgetary provisions, developers will get one year’s time to pay tax on notional rental income on completed unsold residential inventory. Also, the time limit for capital gains to be considered as a long term gain has been reduced to 2 years from the earlier 3 years.

The total allocation for infrastructure is a whopping Rs 3,96,135 crore in 2017-18. We all know that infrastructure development promotes housing as better roads, superior electricity coverage and water supply will expand the cities and newer areas will be open to urban development.

Buyers of Affordable Houses Gain the Most

The Finance Minister announced a change in size requirements of an affordable house from built-up area to carpet area of 30 sqm and 60 sqm. The 30 sqm limit will apply in the case of municipal limits of 4 metropolitan cities and for rest of the country, the limit will be 60 sqm. This move will help buyers of affordable houses live in more spacious homes.

The central government had earlier announced interest subvention scheme for housing loans. Combined impact of the government’s earlier initiatives and budget reliefs will provide major relief to the home buyers.

Demonetization had created surplus liquidity in banks allowing them to reduce their lending rates on home loans. As announced recently, major banks and home finance companies like SBI, ICICI Bank, HDFC etc. have already reduced home loan rates . Further, in Budget 2017-18 it was announced that the National Housing Bank (NHB) will refinance individual housing loans of about Rs. 20,000 crore in 2017-18.

A reduction in home loan rates brings down the cost of purchasing house, making it more affordable. A 50 basis points reduction in a home loan rate over 20 year tenure on 80 per cent of Rs 1 crore apartment of the purchase price will enable the homebuyer to save more towards EMI payments.

Let us understand the actual effect of a reduction of 50 basis points in home loan rates on a property valued at Rs 1 crore.

Property Value – Rs 1 crore
Loan Amount – Rs. 80,00,000 /-
ROI – 9.10%
Tenure – 20 years
Total payment made by customer towards his loan: Rs. 17,398,413 /-

In case of a 50 basis points reduction, ROI – 8.60%
Tenure – 20 years
Total payment made by customer towards his loan: Rs. 16,783,925 /-

Hence the customer saves Rs. 614,488.

If developers receive financial benefit, they will be able to pass on the same to the buyers in form of lower prices as there is intense competition in housing markets, especially in cities like Kolkata. Simultaneously, if buyers get home loans at reduced rates, they will be able to afford homes which they want to buy with a little less concern for affordability.

Kolkata Metro Railway Projects Get a Boost

The budget speech had some good news for West Bengal in general and Kolkata in particular as regards the allocation to the railway. The total outlay for railway projects for West Bengal has actually gone by over 70% as compared to 2016-17. The 2017-18 outlay for West Bengal is Rs 6,336 crore as compared to Rs 3,820 crore in the previous year. A major chunk of this allocation will go for Metro Railway projects in Kolkata, some of which are nearing completion in a phase-wise manner.

Metro Railway, Kolkata is the only metro project in the country that is under Indian Railways.

Faster completion of Metro projects will give massive impetus to the growth of adjacent areas of these routes. It is expected that housing projects in these areas will entail better and faster connectivity to the residents.

The Cost of Owning a Property Will Come Down in West Bengal

West Bengal Finance Minister Mr. Amit Mitra proposed in the state budget to bring down the stamp levy payable to 2 per cent initially from the prevalent 7 per cent at one go and registration fee to 1 per cent from 1.1 per cent. He also offered a 20 per cent discount on the registration fee in certain cases.

According to the proposal tabled in the State Assembly, a buyer will need to pay only 2 per cent of the IGR value of the property (value decided by the inspector-general of registrar) while booking a flat and pay the rest if the deed of conveyance is registered within four years.

Moreover, the balance stamp duty will be applicable only at the IGR value of booking and not when the deed of conveyance is being registered four years later, when the IGR value is usually higher. If, however, the balance is paid after four years, the 5% will be according to the new valuation.

On a flat of Rs 50 lakh, a buyer has to now pay Rs 1 lakh instead of Rs 3.5 lakh at the time of registering the sale agreement. On the Rs 2.5 lakh, a home buyer can earn Rs 17,500 a year through interest in bank deposit or Rs 70,000 before making the payment at the end of the fourth year. Thus a buyer of a Rs 50 lakh property can save up to Rs 80,000, including the saving of Rs 10,000 as rebate on registration fee.

All projects launched after January 1, 2015, can avail of this benefit.

Additionally, homeowners will also be allowed to change the owner’s name to a family member without having to incur additional expenditure.

The Central and the State budget will together help the homebuyers in Kolkata tremendously as there will be substantial financial benefits offered in both budgets and homebuyers will find it somewhat easier to own their dream homes in Kolkata.