New depreciation formula, the taxes on old properties 

Recently, Maharashtra State Government circulate new circular, which aims to increase the stamp duty revenue with the help of change in method of calculation of depreciation in old residential as well as commercial building  and it has caused a flutter in the real estate industry of Mumbai.

As per the statement of legal experts, The department’s November 4, 2015 circular showed that property value has rise by up to 35 percent. Consequently, it is the combined liability of both seller as well as buyer of the property as it can increase by up to 75 percent when they pay stamp duty¸ capital gains tax and income tax. Apart from that it could also do the negative impact on the real estate market in the Mumbai city as well as in state. A realtors’ body, National Real Estate Development Council (NREDC), recently wrote to the finance minister of state by stating that people will find it hard to sell and buy immovable property in an in an already “depressed and a very slow real estate market”. The more he added that “This circular will change the method of calculation when it comes to the depreciation of property in respect to the old buildings and due to that we increase the value of all kinds of constructed properties”. However; the real estate experts warned that this change in the method of calculating depreciation will also add substantially to the cost of premises and it can make the property even more burdensome for those who want to buy property.

Till now the state government guidelines were specifying that buildings age will be taken into the consideration and due to that the value of the building can be depreciated due to the age of building.  However; in present, land is no longer a consideration for calculation of depreciation. According to Lawyer Anil Harish, a real estate specialist stated that this new method of calculation of the property will increases the ready reckoner value of at least by the 30 percent because the depreciation is not allwed after certain level. And therefore it will increase the stamp duty directly amount.  The more he added that the circular now allows that depreciation to a lower extent and due to that the value of premises will be higher for any property and it would increase the quantum of the stamp duty without any confusion”.
According to Ashok Narang, the property consultant “This circular will have a negative impact on the real estate market and the volume of business in real estate in the city Mumbai as well as in state because it will create little more complications for valuation of property for computation of capital gain tax as well”. It will draw a impact on property buyer as they have to pay the excess stamp duty while the seller has to pay additional amount for the capital gains tax. However; government will receive additional revenue by increasing the stamp duty in long run, it will dampen the number of transactions.

How new rule will hit the real estate market?

According to the circular of November 4, 2015;

If you have a 150-square-metre office, which is equal to the 1,614 square feet and it is located at the 4^th floor of a 30-year-old building in the area of Veer Nariman Road, Zone 2/16 of Fort division.

So the value of land will be;

1. As per old method of calculation:

For commercial building the rate per square metre * Area of office * Depreciation factor for age of building

Rs 5, 01,300 * 150 * 0.6 = Rs 4, 51, 17,000

Total value of the property = Rs. 4, 51, 17,000 (Rs 4.5 crore)

2. As per new method of calculation:

Rate per square metre of open land * Area of office

Rs 2, 19,400 * 150 = Rs 3, 29, 10,000

Rate per square metre of commercial building Less Open land rate * Area of office * Depreciation factor for age of building

Rs 2, 81,900 * 150 * 0.6 = Rs 2, 53, 71,000

Total value of the property = Rs 5, 82, 81,000 (Rs 5.8 crore)

No Objection Certificate

The common man in Punjab can now be relieved  as the practice of procuring a no objection certificate (NOC) from the local body or housing development authority for the registration of sale deeds of property has been abolished. Instead, the seller will have to give a declaration regarding the property being within municipal limits and that it is recognised by the housing authority or the local body concerned.

Although the Housing Department has raised objections regarding doing away with the NOC requirement, the Revenue Department has issued a notification, paving the way for self-declaration of property being sold rather than the tedious process of getting NOCs. The matter was discussed at the highest level in the government before the decision was announced.

Revenue Minister Bikram Majithia said that eliminating the need for NOCs was a way forward in governance reforms as people faced a lot of harassment in getting the NOCs. “Moreover, it is the job of the Housing or Local Bodies to see that if anyone gives wrong affidavit, he is liable for action. We have followed the policy of Income Tax department regarding self declaration, rather than getting NOCs from other departments,” he added.

Earlier, under the Punjab Apartment and Property Regulation Act, the seller of the property had to get NOCs stating that the plot/land was within the municipal limits. The change in land use number of the plot had to be submitted along with the copy of approved building plans by the seller with the sale deeds as per instructions issued by the Housing Department. This process has now been scrapped.

Further, other instructions issued by the Housing Department asking Registrars and sub-registrars across Punjab to not register sale deed or any other document concerning sale of land or building, situated in unauthorised colonies, unless the seller gives a self-declaration that he has applied for regularisation of the plot to the authority concerned have also been set aside.

The real estate sector is considered as one of the most important sectors for the economic growth of the country. With very promising plan of providing housing to everybody maximum by 2020, the new government headed by Prime Minister Narendra Modi has taken a very important decision in making few amendments in the law related to the real estate sector.

Finance Minister, Arun Jaitley is encouraged to take pragmatic approach towards the current Income Tax Act scenario. Mainly real estate sector should be given some relief with some positive amendments in the Income Tax Act which will in-turn act as a booster for the growth of real estate sector.

Here are some key pointers for the Finance Minister:

• Loan amount with Higher deduction

In the previous years In 2001, Finance Minister has raised the interest deduction limit on housing loan from Rs 30,000 to Rs 1,50,000 for individuals and Hindu Undivided Families (HUF).

In the record history of last 14 years, the house prices have raised only. On the other hand, with high paying jobs people have better financial conditions which is further adding to investment costs. So, it is very evident that new real estate development and the investment, both, are going up.

But we should not forget that along-with increasing number of millionaires and multi-millionaires coming up, demand of housing is also rising constantly. Currently, the amount of deduction allowed for the housing loan is just Rs 1,50,000 per annum, which implies that on an average, just for Rs. 15 lakhs  a house can be purchased and the deduction for interest on loan being allowed up to Rs 1,50,000 only.

The government’s take on this for improving the real estate sector should be an increased deduction for interest on housing loan to minimum Rs 2,50,000 especially considering the rising prices.

• Developers with small housing projects should be given tax exemption

Currently, all the developers have too pay taxes on their income irrespective of the size of projects they are building, thus, even if a builder is developing a residential house of 1,000 sq ft he has to pay the taxes. So, if the government wants all the developers of India to construct affordable houses for the common man, it should grant exemption in the income tax to the developer and also developers should also be asked to reduce the selling cost. Such dynamic approach can help in resolving the housing problem in the country.

In fact, this type of provision was there before in the past, in which tax deduction was allowed through Section 80IB (10). According to which if a housing project was taken on minimum 1 acre of land and the houses were built up to 1,000 sq ft in metropolitan cities or 1,500 sq ft in other cities of India, the developer was provided with complete exemption.

• Reduce the Stamp duty rates

There is a different stamp duty rates in different states of India for all real estate transactions. If the government is really keen on a big growth in the real estate sector and would want to see a fast turnaround of property buying and selling transactions, then this is the time to implement the concept of stamp duty in India, which is widely applicable overseas where half per cent or one per cent stamp duty is payable.

• Investment restriction on commercial property

Currently, if a person is selling his residential/agricultural property, he can save tax on capital gains taxes through investment in another residential/agricultural property of his choice. But, in case of a commercial property, he can’t reinvest in any other commercial property or a commercial space in a mall or a shop. Hence, the current Income Tax Law should be amended for allowing investment in commercial property out of the sale of another commercial property in order to save tax or Long Term Capital Gains.

• Bring in the concept of Real Estate Investment Trust (REIT)

In the last few years, government did try to implement the concept of Real Estate Investment Trust (REIT) in the past which is already a well-developed business concept in many developed countries of the world. The government should make realistic rules and regulations for framing guidelines to set up REIT especially for the small investors there should be a provision to form REIT.