New Delhi: Infrastructure status to affordable housing in the Budget 2017-18 will have a positive impact on low cost home segment but the impact will be muted in the luxury and mid-income residential segments, according to Moody's Investor Service.
"The biggest and the most impactful policy directive for the real estate sector is the granting of infrastructure status to affordable housing. "Such action will allow developers to borrow at lower interest rates and provide tax exemptions to the construction industry that has witnessed a reduction in launches and sales these last few years," Moody's said in a statement.
Policy directives in the Union Budget for next fiscal will have a positive impact on the affordable housing segment but the positive impact will be muted in the luxury and mid-tier segments of the market, it said.
Real estate firms will also benefit from the one-year exemption on notional rental income from unsold inventory, it said, adding that effectively, this means that they will receive tax relief, given the reduction in sales post demonetisation. The measures introduced to reduce the capital gains tax will help the secondary real estate market and "a more liquid secondary market will in turn benefit the primary market", Moody's said.
The holding period for capital gains on immovable property, land and buildings to qualify as a long-term investment has been reduced to two years from three. At the same time, the base year for the calculation of capital gains with indexation benefits has changed to 2001 from 1981, the report said.
"These steps will reduce the capital tax burden on property sellers, thereby spurring the secondary real estate market. This result may in turn increase investor activity in the residential market," Moody's said.
However, the agency said that the benefits from this measure might be offset to some extent by the negative impact from applying a cap on the amount of losses that can be off-set against annual income.
"A proposal in the budget includes setting a cap on the amount of set-off losses from residential property against annual income at Rs 200,000 per annum. Previously, all the losses from residential property including interest paid on mortgage to buy the property could be set-off against other sources of taxable income, which brought down the tax payable," the report said.
The proposed move will adversely impact property demand as the tax benefit on buying a property for investment purposes comes down, it added.
"The introduction of the cap on the amount of losses that can be off-set will continue to keep the investors away from the mid-tier and high end segments of the market," Moody's said.
