A look at the many taxation nuances in affordable housing

Amidst the high-octane growth of the residential sector, the affordable housing segment has been the torchbearer of sustainable urban development. With a burgeoning population and surging demand for quality housing, the affordable segment has found its ground and bridged the gap. However, it is important to know the segment’s taxation nuances and how they can be leveraged to derive maximum benefits.

Government schemes for affordable housing

Developers of affordable housing projects are in an advantageous position. Under various government schemes like the Pradhan Mantri Awas Yojana (PMAY), they can get incentives, such as interest subsidies and tax breaks, creating opportunities for them to actively foray into the segment. Moreover, the GST rates for the segment are lower than mid- and luxury-segment projects, making it a lucrative proposition for developers keen on exploring the segment.

The introduction of the Input Tax Credit (ITC) allowed developers to claim credit for taxes paid on inputs used in construction. However, it should be noted that the effective tax rate is lower for affordable housing projects and developers cannot avail full ITC benefits.

Additional deductions for homebuyers

Homebuyers are actively driving the success of the segment through demand generation and sales. As a part of section 80EEA of the Income Tax Act, homebuyers investing in affordable assets for the first time are entitled to get additional deductions on home loan interest payments. This has democratised home ownership and made it easier for people with lower incomes to own a home.

Another taxation benefit is the exemption on capital gains. While capital gains from sales of traditional assets are taxable, a homeowner or investor can get exemptions if the proceeds are reinvested in affordable projects. This is increasing investor interest in the segment and contributing to the entire residential real estate investment ecosystem.

Reduction in stamp duty

Lastly, the taxation nuances in the affordable segment have become crucial in reducing the stamp duty that otherwise constitutes a significant part of the total property transaction costs. The relaxation offered by various state governments has incentivised homebuyers to invest in properties and made homeownership accessible and affordable.

Conclusion

In a nutshell, taxation nuances play a crucial role in shaping the affordable housing landscape in the country. While tax incentives are driving development and homeownership, the segment’s full potential can be realised through transparency and robust policy implementation. By fostering a conducive regulatory environment and addressing systemic challenges, India can accelerate its journey towards providing quality, affordable housing for all segments of society.

(The author is the Managing Director – BCD Group.)