Providing affordable housing seems a viable option for many builders

The Union Budget 2012-13 has received mixed reactions from various sectors. Let us analyse what the new budget means for home finance and real estate sectors.

The real estate sector

The real estate sector has expressed its displeasure due to the following measures proposed in the Budget.

Increasing excise duty from 10 to 12 per cent on raw materials of construction

Increase in excise duty on cement, steel, electrical, plumbing and finishing items is surely going to increase the cost of construction considerably.

Increasing service tax on sale of houses under construction from 10 to 12 per cent

The service tax levied on 25 per cent of sale price of all types of houses under construction would further burden the buyers as builders would pass on such cost to them. However service tax is not applicable to ‘affordable housing' projects with less than 60 square meter houses, approved by the government.

Levy of TDS

Levying of one per cent TDS for sale of property

In order to collect tax early and to have control over real estate transactions, the budget has proposed to collect one per cent of sale consideration as Tax Deduction at Source (TDS) from the transferee (purchaser), if property cost is more than Rs. 50 lakh in specified urban agglomerations (large cities) and Rs. 20 lakh in other areas.

Like any other advance tax paid, the transferor (seller) can get the credit for the TDS. The amendment will be with effect from October 1, 2012.

Altering the ambit of exemption from Capital Gains tax

The budget has proposed to exempt sale of residential property (including open land) from capital gains tax, if invested in equity or equipment of an SME (Small and Medium Enterprises) unit. Although the option gives more avenues in investing, it could result in cash flow out of real estate.

Home Finance sector

Important measures proposed in the Budget include:

Extension of the subsidy scheme, providing one per cent subsidy on housing loans up to Rs. 15 lakh for purchase of homes valued up to Rs. 25 lakh

People buying homes costing less than Rs. 25 lakh and where the home loan availed is up to Rs. 15 lakh, get subsidy of one per cent interest for the first year of repayment.

Thus one can get a one-time maximum subsidy of Rs. 15,000.

Setting up of Credit Guarantee Trust Fund to ensure better flow of institutional credit for low-cost housing projects

The Union Government plans to set up a Trust Fund, making available long-term cheaper funds exclusively for low cost housing projects

Allowing NHB (National Housing Bank) to float tax-free bonds up to Rs. 5,000 crore to augment resources for refinance schemes

The refinance would be extended to eligible banks, Home Finance Companies (HFCs) and other institutions for small loans up to Rs. 15 lakh only.

New option

Permitting funding through external commercial borrowing (ECB) route in housing projects

The NHB, HFCs and large housing projects approved under the ‘affordable housing' scheme can raise money through the ECB route for funding low cost housing. ECB could be a huge resource at much lesser cost, compared to project finance available from banks and HFCs.

It is estimated that housing shortage in the country is more than 25 million units, out of which more than 90 per cent shortage is found to be in lower income groups and economically weaker sections. Hence the Government is trying to give impetus the affordable housing segment. It is certain that in all urban places where property costs are much higher and home loan required is much more than Rs. 15 lakh, none of the proposals suggested in the Budget would help the common man.

From the late 1990s, a majority of the builders started focusing only on the high-end or luxury segment of housing, that too in urban areas, because they found the luxury housing segment a ‘goldmine' and went on reaping unimaginable profits, till the ‘sub-prime crisis' in 2008, which affected the real estate sector very badly.

Once there were signs of the country coming out of recession in 2009-10, the builders again went on developing only luxury homes.

Banks went on funding high-end projects in a big way, even ignoring the RBI's caution. And HFCs also followed suit in a bid to not lose the market share.

Today, if the real estate sector is tottering in high debts, low liquidity and tepid demand, it is because of excessive exposure to high-end projects.

Builders should understand that by developing affordable housing projects, which is a long-term viable business proposition, the value earned from focussing on the deserving masses would be more than satisfying.

(The author is Director, Institute of Home Finance, and can be contacted at