Budget Expectations 2025: Real estate

Direct Tax

Expectation #1: Increase in deduction for home loan repayments

• Currently, the repayment of the principal component of home loans is eligible for tax deduction under Section 80C. In contrast, the repayment of interest component of up to INR 2 lakh qualifies for tax deduction under Section 24(b).
• However, with multiple investment options, small savings instruments, insurance policies, pension plans, etc., crowding Section 80C, many home loan borrowers remain bereft of availing tax deductions on their entire home loan principal repayments. Similarly, the upper cap on Section 24(b) becomes inadequate for many home loan borrowers, especially in the initial years of their home loan tenure.
• Hence, there should be a separate section for home loan repayment with a combined maximum deduction of up to INR 5 lakh for both principal and interest components. This would boost home buyers’ sentiments and, thereby, increase demand in the housing industry.

Expectation #2: Restriction on set-off of loss from house property against the income under any other head of income during the same year up to INR 2 lakh

• Until FY2016–17, house property loss was allowed to be set off against income arising under any other heads of income during the same year. Section 71(3A) has been introduced effective from FY2017–18 (Assessment Year - 2018–19) to restrict the set-off of loss from house property against the income under any other head of income during the same year up to INR2 lakh.

• The loss not so set-off (exceeding INR2 lakh) would be allowed to be carried forward for set-off against house property income for the next eight assessment years. The intention behind this amendment appeared to curb interest deduction in respect of second house property owned by an individual or a HUF.

• However, the amendment is applicable to all house properties, including commercial house property. This is detrimental to the real estate industry engaged in the construction and leasing of commercial properties wherein, in the initial years, heavy house property loss is generated due to interest deduction.

• Hence, this restriction of allowability of set-off of house property loss only up to INR2 lakh against other heads of income should either be removed entirely or commercial properties should be excluded from this provision.

Expectation #3: Consequential amendments to be made in Sections 54, 54B, 54D and 54F

• The Finance Act, 2017 amended section 2(42A) to reduce the period of holding from existing 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long-term capital asset. The same is done to promote the real estate sector and make it more attractive for investment.

• Further, even the Finance Act 2024 has reduced the standard period of holding for capital assets from 36 months to 24 months to qualify as long-term capital assets.

• However, the exemption provisions relating to capital gains on immovable property provided under Sections 54, 54B, 54D and 54F still provide a minimum period of holding of 3 years for new assets purchased or constructed.

• Consequential amendments for reducing the holding period of immovable property from 3 to 2 years are required to be made in Sections 54, 54B, 54D and 54F in line with the amendment in Section 2(42A).

Expectation #4: Tax on notional rent on unsold properties held as stock in trade

• Section 23(5) provides to tax the notional rental income in respect of unsold property that is held as stock-in-trade and which is not let out during the whole or part of the year after a prescribed cooling period of 2 years from the end of the financial year in which the completion certificate is obtained from the competent authority.

• While the provision provides for a cooling period of 2 years from the end of the year in which the completion certificate is obtained, there are chances that a genuine developer might not be able to sell off its entire inventory.

• Real estate developers hold the land and buildings as inventory for development and sale to consumers, like any other manufacturer, which holds raw materials, process stock, and finished goods. Real estate developers can't lease out the ready-to-move inventory. Hence, taxing the deemed rental on the properties held for sale is highly unjustifiable.

• Considering the industry needs, the following are our recommendations:
  i) Provision of Section 23(5) may be rationalised in order to provide a higher cooling period of 5 years instead of the existing 2 years period or
  ii) Amend the section to tax the deemed income only when the property is developed as rental income generating assets.

Expectation #5: Include the Real Estate sector within the purview of Section 72A

• Under the existing provisions contained in section 72A of the Act, the benefit of carry forward of losses and unabsorbed depreciation is allowed in cases of amalgamation of a company owning an “industrial undertaking” or a “ship” or a “hotel” with another company, or a “banking company” with a specified bank or “one or more public sector company or companies engaged in the business of operation of aircraft” with one or more public sector company or companies engaged in similar business.

• The term “industrial undertaking” is defined to mean any undertaking which is engaged in the manufacture or processing of goods, manufacturing of computer software, the business of generation or distribution of electricity or any other form of power, the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services, mining or the construction of ships, aircraft and railway systems.

• Generally, companies that fall within the meaning of an “industrial undertaking” are capital-intensive and have made huge investments at the time of setting up. However, there are various other capital-intensive industries (such as real estate) which are not covered under this provision as they do not fall within the meaning of an “industrial undertaking”.

• It is recommended that the scope of section 72A of the Act be widened to include other capital-intensive sectors such as real estate and infrastructure.

Expectation #6: Taxation regime in case of JDA entered by assessees other than an individual or HUF

• The Finance Act, 2017 inserted sub-section (5A) in Section 45 to provide that capital gains arising in the case of Joint Development Agreements (JDAs) shall be chargeable to tax in the year in which the competent authority issues a completion certificate.

• This provision is applicable only in cases where the owner of immovable property is an Individual or HUF. The law does not provide taxability if any other assessee has entered JDAs.

• A large number of developers work in a body corporate framework which currently does not have any express provision to deal with the taxability of JDAs.

• Thus, it is recommended that the government should bring specific provisions regarding the taxability of JDAs entered by assessees other than an Individual or HUF.

Expectation #7: Increasing the safe harbour limit in Sections 43CA, 50C and 56

• Currently, a safe harbour limit of 20 percent variation is allowed between the Stamp Duty Value (SDV) and the sales consideration for an immovable property without triggering any adverse consequences under the provisions of Sections 43CA, 50C and 56 of the Income Tax Act (as applicable).

• In certain states, there is generally a significant/considerable difference between the SDV rate and the actual sale consideration. Also, the delta of 20 percent of consideration is highly inadequate as SDV is determined per area and not per property. The circle rates may vary due to several reasons.

• While the government has time and again increased the limits, it is recommended that the delta of 20 percent be increased to at least 25 percent. Further, since this amendment is a rationalisation measure, it may be made applicable retrospectively from the date the provisions were inserted.

Expectation #8: Enhancement of limit for deduction under section 54EC

• Section 54EC provides for exemption on capital gains from the transfer of property (land or building or both) provided the capital gains is invested in specified bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited (RECL).

• The exemption is subject to a limit of INR50 lakh. This limit of INR50 lakh was fixed with effect from 01 April 2007. With the general increase in inflation and interest rates, the present limit of INR50 lakh appears very insignificant compared with the increase in land prices and other incidental expenses in connection with real estate.

• Hence, it is recommended to increase the limit under section 54EC to INR1 crore.

Expectation #9: Reintroduction of a 100 percent tax holiday for an affordable housing project

• Section 80-IBA of the Act provided 100 percent tax exemption to the developers of affordable housing projects. The benefit was available for projects approved before 31 March 2022 (sunset date).

• To address the growing housing shortage, especially for low-income and middle-income groups, reintroducing the 100 percent tax exemption under Section 80-IBA for affordable housing projects will incentivise developers to increase their focus on affordable housing. This will help achieve the government's Housing for All goal and alleviate pressure on urban housing markets.

• Extend the exemption for affordable housing projects with updated criteria, such as project completion timelines, sales price caps and increased floor area ratio (FAR) limits.

Expectation #10: Introduction of the tax consolidation regime

• In India, multiple subsidiary structures are prevalent to house businesses in separate entities under the parent company. Such structures are particularly common in the real estate sector, where each project is housed under a separate SPV.

• While such structures provide commercial ease, they result in various challenges from a tax perspective for both the taxpayer and tax department, such as:
  For the taxpayer:
  i) Practical challenges: Tax leakages, cash traps, refund of taxes withheld on interest and dividend payments, double taxation of income and inability to use tax attributes—impact on group ETR
  ii) Compliance challenges: Filing separate income tax returns, undertaking tax audits, withholding tax compliances and furnishing other tax related forms/applications/declarations for each of the group entities
  For the tax department: Administration costs to monitor and assess each entity for potential litigations or inconsistencies in filings, deposit of taxes, etc.

• In view of the same, a “Group Tax Consolidation Regime” can be introduced wherein group companies (comprising wholly owned subsidiaries or entities wherein majority or substantial stake or interest is held, including trusts and collaborations) are deemed to be one single entity for tax purposes. The regime could (among other things) enable the following:
  i) Consolidation of group tax filing: A group of wholly owned or majority-owned companies should be treated as a single entity for taxation purposes, and intra-group transactions should be ignored for return filing.
  ii) Group taxation: Offsetting losses incurred by one or more group companies should be allowed against the profits of other companies in the group.

• The said arrangement in the form of a corporate tax regime for the group will prove beneficial for the taxpayer and department alike and will significantly reduce tax compliance and administration costs.

• Based on the principle of common control, tax provisions in major OECD countries disregard the tax implications of intra-group transactions. This also eliminates additional compliance burdens and costs.

Expectation #11: Introduction of dividend deployment deduction/exemption

• In a group structure comprising multiple layers, funds are typically repatriated by way of distribution of dividends.

• Currently, if dividend received by a company from its subsidiary is redistributed by it to its parent, a dividend distribution deduction under section 80M of the Act may be available to the company subject to fulfilment of certain conditions. This helps avoid double taxation of income and improves overall returns for the group.

• However, if a company (being the recipient of dividend income) redeploys the dividend in business expansion or other business activities, no deduction/exemption will be available to the recipient company, and the dividend so received will suffer tax in its hands.

• The introduction of an exemption/deduction in this context would promote the redeployment of funds in the country until a tax consolidation regime is introduced in the Income Tax Law.

Specific REITs related recommendations

Expectation #12: Extension of benefit/safeguards available on migration to REITs structure

• Per the typical practice followed for “setting up of” or “migration” to a REITs structure, sponsor transfers their real estate assets/shares/ securities to the Trust in exchange for units.

• Currently, on this migration, the exchange of shares of SPVs (holding qualified real estate assets) in lieu of issuance of units of REIT is exempt from tax under Section 47(xvii)/Section 115JB of the Act at the time of migration and is deferred to at the time of sale of units of REIT.

• However, no exemption is provided from the other possible tax exposure on migration to the REIT structure. The sponsor may hold interest in real estate assets other than in the form of shareholding (such as direct ownership of residential property or rights or interest in immovable property or any security other than shares in SPVs). In the absence of a specific exemption, the transfer of these assets may suffer tax incidence in the hands of the sponsor at applicable rates.

• In addition to the above, in case SPVs have substantial business losses, the same may also lapse on account of a change in shareholding due to the transfer of shares of SPVs to the REIT in exchange for units per Section 79 of the Act.

• It is recommended that the purview of exemption on migration to REITs structure be extended to cover:
  i) All forms of contribution made on migration to the REITs structure rather than limiting it to the shares of SPVs.
  ii) Specific carve-out from the rigour of the provisions of Section 79 of the Act on migration to the REITs structure.

Expectation #13: Re-classification of the distribution received by unitholders of REIT taxable as “Income from Other Sources (IFOS)” under Section 56(2)(xii) of the Act

• Vide Finance Act 2023, any sum received by a unit holder from a REIT [except in the nature of 10(23FC) and 10(23FCA)] income is not chargeable to tax under Section 115UA(2)] and shall be considered as “income from other sources” under section 56(2)(xii) of the Act. Where the sum received by the unitholders from REIT is towards redemption of units held, the sum received shall be reduced by the cost of acquisition of the units to the extent such cost does not exceed the sum received and excess, if any, would be taxed as IFOS.

• On the other hand, any sum received from sale of units of REIT is governed by the provisions of Section 45 and therefore, any gains derived from sale of REIT units, is taxed as capital gains in the hands of unitholder.

• The current provisions to tax the said gains under income from other sources under section 56(2)(xii) are not in line with the existing provisions of Section 45, where the gain on transfer of units is treated as capital gains. This results in differential tax treatment for the redemption and sale of units, though the underlying nature of the income is the same.

• For parity in taxability of similar incomes and to resolve the hardship, it is recommended that the current provision of taxing gains on redemption of units as “Income from other sources” under section 56(2)(xii) should be amended, and such income should be charged to tax under the head “Capital gains”.

Expectation #14: Clarification on availability of dividend exemption to unitholders of a REIT having Hold Co, which in turn holds SPVs

• Distribution of income as dividend by a REIT to unit holders continues to be taxable in the hands of the unitholder if the SPV had opted for the lower tax regime under Section 115BAA. In another scenario, where the SPV has not opted for such a lower tax regime, the income is exempt in the hands of unitholders.

• However, in a situation where SPV (under the old tax regime) is being held by a Hold Co (under the new lower tax regime) below REIT, it is unclear whether the dividend distributed by such old tax regime SPV via the Hold Co (under new lower tax regime) will qualify for the aforesaid exemption or not.

• The intent of the law is to provide an exemption to any dividend which has already suffered a higher corporate rate tax in the hands of SPV. Therefore, it is recommended that the benefit of dividend income exemption from dividend income in the hands of unitholders should be extended to the above scenario as well, wherein the Hold Co is just passing on the dividend received from SPV, which is under an old regime, regardless of the tax regime adopted by Hold Co. 

• Further, in the case where Hold Co does not opt for the lower tax regime, then while the dividend received from the SPV may not be subject to tax under normal tax provisions on account of benefits provided under section 80M of the Act (subject to satisfaction of conditions). However, the dividend income in the hands of Hold Co shall still be tested for tax incidence under MAT provisions.

• Provision similar to Section 80M can be introduced for the MAT regime as well.

Expectation #15: Relief from double taxation of dividend income

• Distribution of income as dividend by a REIT to investors/unit holders continues to be chargeable to tax in the hands of the unitholder if the SPV had opted for the lower tax regime under Section 115BAA. This leads to double taxation, where both the SPV and the unitholders suffer tax incidence at their respective ends.

• There is a need to remedy this issue as it acts as a disincentive for investing in REIT structures. Therefore, it is recommended that exemption in the hand of unitholders should be extended to dividend distribution received from SPVs which have opted for lower tax regime as well.

Indirect Tax

Expectation #1: Increase in carpet area and monetary limit of affordable housing

• Currently, two conditions have been prescribed for the lower GST rate of 1 percent to apply to affordable housing units
  i) sale value up to INR45 lakh; and
  ii) carpet area of up to 90 sqm (in non-metropolitan cities/towns) or 60 sqm (in metropolitan cities)

• Considering the increase in prices of the inputs and the rising inflation, the government must review the monetary limit of INR45 lakh in the upcoming Budget.

• In order to achieve the objective of the “Housing for All” scheme, it is imperative that the monetary limit of INR45 lakh be increased. Further, a proper mechanism should be implemented to regularly review such thresholds.

Expectation #2: Reduction in GST rates applicable on inward supplies used for construction

• Currently, the inward supplies used in construction are taxable at a higher rate (works contract services: 18 percent, cement: 28 percent, RCC: 18 percent, Steel: 18 percent, etc.) without any input tax credit to the developer.

• Reducing the GST rates on inward supplies would help reduce the cost of apartments for homebuyers and, thus, provide impetus to the real estate sector.

Expectation #3: Exemption on leasehold rights

• Currently, exemption has been provided to long term lease of industrial plots by State Government Industrial Development Corporations or Undertakings, for industrial or financial activity subject to satisfaction of certain other conditions.

• It must be noted that a long-term lease is akin to the sale of land and has become an alternative to the sale of land. Accordingly, the government must provide a blanket exemption to the long-term lease of land irrespective of the class of service provider, purpose of the lease, etc.

Expectation #4: Input tax credit must be allowed in relation to construction of projects for commercial leasing

• Input tax credit on construction of projects developed for commercial leasing has been a contentious issue, travelling up to the Apex Court, which held that input tax credit must be allowed if the same qualifies as plant or machinery for the developer.

• Considering the decision of the Apex Court, the government must issue a clarification regarding such buildings as plant or machinery for developers.

Expectation #5: Exemption on development rights for construction of commercial properties for leasing

• At present, development rights granted for the construction of commercial properties intended for leasing are subject to GST, and the departmental authorities at the ground level are disputing the availment of ITC when the same is used for commercial leasing on which applicable GST is discharged.

• This results in a dual tax burden for developers, taxability on development rights and ITC disallowance.

• To alleviate this financial strain, the government should introduce an exemption on the transfer of development rights used for constructing commercial properties intended for leasing purposes.