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Capital Gains

The last quarter of the financial year it a time for most individuals to complete there tax assessments for the concluding year.

For anyone who has recently sold a property or is planning to sell, capital gains tax would naturally be at the top of your mind. Given below are some details and points that would make it easier for you to plan your sale, tax and future investments.

• If you sell a property before 24 months from date of purchase it will be treated as a short term capital gains (or loss). If you sell a property after 24 months from the date of purchase it will be considered as long term capital gains (or loss)
• LTCG or STCG is calculated on the difference in the total sale value of the property with the total cost of purchase of property including cost of registration, renovation etc.
• LTCG in India is taxed at a fixed tax rate of 20% of the difference in sale and purchase value. STCG is added to the taxable income of the current financial year and taxed according to a persons tax slab.
• Capital Gain from sale of one property can be offset by any capital loss on sale of any other property during the similar time period.
• To offset the capital gains from sale of any property, the exceeding amount (profit) needs to be invested in another residential property within a period of 2 years (for a ready residential purchase) or within 3 years in case of purchase of an under construction property. The new property cannot be sold for a minimum period of 3 years from the date of purchase of property.
• In case you do not purchase another property within the specific time period you can deposit the exceeding amount into a capitals gains account in a scheduled bank or in certain government designated infrastructure bonds.
• For calculation of the profit, in case the original property is sold after a long time gap from the date of purchase of property, it original purchase price indexed for inflation for the purpose of calculation of profit amount.
• Capital gains exemption is only available on purchase of one property.

Recently the Indian Government has approved an increase in the carpet area of houses eligible for interest subsidy under the Credit Linked Subsidy Scheme (CLSS) for the Middle Income Group ( MIG) under Pradhan Mantri Awas Yojana (Urban).

The carpet area in the MIG I category of CLSS is now increased to up to 120 sq metre from the earlier 90 sq metre. Carpet area for MIG II category of CLSS has been increased to up to 150 sq metre from the earlier 110 sq metre. This is a great step to meet the challenges of urban housing shortage and making housing more affordable for everyone.

Under the scheme, MIG I beneficiaries with annual income of between Rs 6 lakh and Rs 12 lakh will get an interest subsidy of 4% on home loans (upto 2.67 Lacs). In MIG-II, those with annual income exceeding Rs 12 lakh and up to Rs 18 lakh, will get an interest subsidy of 3%.

Due to this increase in eligible size of apartments now most 3 BHK Apartments in Zirakpur will fall under this scheme and lead to better options as far as choice of apartments is concerned for home buyers along with financial savings as well.

This can be a great time to look to invest in your own home for people staying in rented properties around Chandigarh so go ahead and grab the opportunity.

Q1 of 2018 is set to be a great time for investing in Real Estate in India, especially for NRI’s.

Here are some of the reasons as to why?

As we say goodbye to 2017, lets take a look at how the year has fared for the real estate market for both developers and buyers alike.

The year stared on an extremely slow note reeling from the effects of demonetization and due to the initial troubles of GST, we saw a very cautious buyer in the 1st half of 2017. The period was challenging for real estate developers of the tri city.

However the 2nd half of 2017 (especially the last quarter) has been significantly different. Sales of finished apartments have been great, especially in the Zirakpur market. This has been due to various factors:

1. The short term slowdown post demonetization ended. (The expected price drop did not arrive simply because the prices had been at the lowest crest for a couple of years anyway. Also primary apartment sales have never really depended on cash, they have been 100% cheque based transactions using home loans, so the expectation of price correction in the first time apartment sales was unfounded to begin with.)
2. GST implementation lead to a slowly stabilising market especially in the Ready to Shift category where there is no GST burden on the buyer.
3. RERA implementation led to increased confidence among the buyers, especially in the organised players.
4. Reducing home loan rates by leading government and private banks.
5. Reduction in stamp duty rates by the Punjab government was also a great step to reduce the taxation burden on the buyers.

Forecast for 2018?

The above mentioned factors including a stabilized and transparent GST regime, a strong RERA mechanism, cheaper finance options for apartment buyers and strong support by government of Punjab will ensure that 2018 is much better that the last 5 years for both the developers and buyers (especially in the Zirakpur Area).

Even Industry leaders like Godrej Properties and CREDAI are of the opinion that the coming two years will see a lot of growth in the real estate market of Tier 2 & Tier 3 cities of India.

Therefore the coming few months are a great time to be a home buyer. They can take advantage of the numerous ready to move options available in the market and get their dream homes at a good value before prices start increasing due to reducing inventories and a market that’s begun to take pace again.

It is widely known that GST will be implemented by July 2017. This step along with RERA will be a major step to try to “boost” the real estate sector, which has been sluggish for many years now.

Let us look at GST’s impact on the Real estate market with a micro view on the residential group-housing sector

Short Term Impact

The impact on the short term will be dependent on the rate slab for Real Estate Sector. If, as widely predicted the real estate sector is subjected to GST at the 18% slab, it will translate to an approx. 1.5%-2% increase in cost for the buyers come July on projects that are nearing construction or are ready in phases.

Long Term Impact

Over the long term, GST is expected to lead to a simpler tax regime which is much needed in a sector plagued by a multitude of taxes like VAT, Service Tax, Stamp Duty, Registration Charges etc.

Buyers & Developers alike will welcome this step as it reduces uncertainty & ambiguity in the various taxation levels and increases the ease of doing business. Moreover the overall beneficial impact on our GDP growth will in directly boost demand in the real estate sector as well.

Also, in case the developers are allowed to receive input credits for the taxes paid for construction purposes, they may have some more margins that can be passed on to the buyers. However, that will only be the case in projects that are started after GST roll out and they effect will probably only be in seen after a 7-10 year time period. Moreover, it is still not clear whether such input credits will be allowed for real estate sector or not.

Missed Opportunity?

As stamp duty and registration charges have been kept out of the purview of GST, it can be said that the direct impact of this law on the affordability of group housing will be limited. It may have been a better step to include these into the purview of a single GST to be able to give a real boost to the group housing industry.

Looking for your dream home and confused about the options that exist in the Market?

Use this handy flat comparison scorecard to evaluate the various apartment projects available and come to an informed decision based on your on preferences.

All you need is to take a print out of this scorecard, fill in your scores into the empty boxes as you research various projects and then compare in the end.

Happy House Hunting!

• Land Title Deed
• CLU Approval (Change of Land Use)
• Local Body (Municipal Council) Clearance
• Environmental Clearance
• Fire Department Clearance
• Electricity Board Clearance
• Pollution Control Board Clearance

Apartments these days are generally priced on the basis of the super built up area. However, the actual usable area of a flat might be significantly lower then the super area that is being marketed. This difference is due to the kinds of spaces included in calculating the different metrics and due to the lack of a uniform approach amongst the developers.

Therefore a buyer must be very clear as to what are the areas that he is paying for. As most developers use the super built up area (saleable area) for marketing purpose, a buyer must gather the required information from the developers to be able to come to an informed decision. Please ensure to:

1. Ask each developer for the absolute figures of carpet area, covered area, balcony area, common passage area and all other areas (if any) loaded into the super area, instead of accepting an approx. percentage figure like 25% loading as claimed by most developers.(Ideally the Super Area to Covered area markup should not be exceeding 20%)
2. Ask each developer to reveal the exact common areas considered while calculating the super area. (For eg. was parking area/clubhouse area included in it or not)
3. As an informed buyer, please do calculate the areas given in the layout plans shown by the developers to evaluate the actual area that you will be able to use. It quite possible that a 1800 sq ft flat (Claimed Super Area) might actually have a smaller usable area than a 1600 sq ft flat (Claimed Super Area). This difference will arises due to the conservative /aggressive approach taken for calculation of the super areas by the respective developers.
4. Please do visit and see the actual room sizes of the flats to be able to gauge the area being claimed

It is important to note that the Real Estate Regulation Act of 2016 (RERA) makes it mandatory for the developers to reveal the covered/carpet area in addition to the super area.

Some of the metrics used to calculate the area of a flat:

1. Carpet Area

The Real Estate Act – 2016 defines Carpet Area as:

“The net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment”

This is the internal area of the flat measured from wall to wall taking into account the actual usable area available from the internal faces of the walls.

However, some developers may add 50% or 100% of the area available in other spaces like balconies and terraces.

2. Built Up Area / Covered Area

The covered area is the total area available inside the flat including the wall thickness and any ducts. Generally it is estimated to be about 15% bigger than the actual carpet area.

3. Super Area/Super Built Up Area

The super built up area is calculated by adding a markup amount to the covered area for common spaces like lifts, staircases, lobby entrances etc. Ideally, for the purpose of calculation the areas for all the common entities should be calculated and divided by the total number of flats. However, a rule of thumb that is used by many developers to calculate it is by using a loading factor. For instance if the loading is taken to be 25% then they will simply multiply the carpet area by 1.25.

Since there is no standard rule for calculation of super areas, many developers can use a loading factor of almost 30-35% and some even going as high as 50%-60% by adding spaces like the parking area as a part of the super built up area as well.

Since the announcement of Demonetization on November 8th, a major concern for many stakeholders has been the negative sentiment that has been building up about the near term future of India’s Real Estate Sector. As an industry dominated by the presence of cash based transactions, it would seem on the face of it that these fears are well placed. However, it must be noted that having a macro view of the entire industry displays only half the picture. Lets dig a little deeper and look at the major sub sectors of this industry:

• Primary Residential Real Estate 
• Secondary Residential Real Estate
• Primary Commercial Real Estate
• Secondary Commercial Real Estate

As far as the primary residential real estate market is concerned, the impact should be very minimal. This is because this sector was anyways having very few instances of cash based transactions, especially in Tier 1 and Tier II Cities. A major proportion of the end user purchases are made availing the home loan-financing option. There may be a slowdown in sales in the very short term due to uncertainty and an expectation of price correction, but there will be very less impact on both prices and sales in the medium term. If we look at the expected impact of demonetization in the long term, it should lead to a reduction in home loan rates, as banks will be looking for avenues to lend the newly acquired capital at very competitive interest rates. Normally, lower home loan rates give a major boost to demand for housing, and as housing contributes about 90% of the total real estate market in India, this bores well for primary, organized real estate sector. In fact, if backed up with a couple of steps by the government, this can be a very beneficial move for buyers and developers alike in the primary real estate market.

For the primary commercial real estate market, there will also be negligible impact on the leasing part of the industry. We can expect some slowdown in the sale transactions in the short term as investors may face liquidity problems, however the impact should reduce in the medium term. As it is, this particular segment contributes a very small portion to the overall real estate industry and therefore any impact here is not likely to have a major effect on the industry as a whole.

The secondary sales market for both commercial & residential real estate had a major component of cash based transactions and therefore will be severely affected due to demonetization. We can expect a transaction freeze in the short term in the secondary markets and some degree of correction in prices can be expected in the medium term. Due to these reasons, we may also see investors now showing more interest in the residential market once again rather than the commercial markets.

Steps that can boost the Residential Real Estate Sector:

If we look at the market today, primary real estate is already heavily taxed. A total of 35% (see Annexure 1) of the value of any property goes into taxes (both central & state government) or governmental departmental fees. This burden is consequently passed on to the end users of the properties.

For an industry that contributes 7% to our GDP & is the second highest employer in India after agriculture, it is necessary to take steps to boost its organized, regulated and transparent growth. Some measures, which we think maybe useful, are:

• Reducing home loans by a minimum of 2% for first purchase of property.
• No stamp duty on a property purchase made by 1st time homebuyers.

These two steps alone will reduce the cost burden by 12-14% thereby reducing the total transaction cost that the end user has to bear & will bring good quality housing into the preview of the common man while also maintain adequate margin for the builder so that even in the Tier II & III cities the smaller builders also don’t resort to cash based transactions to save on taxes.

Such measures, along with a curtailment of black money and the steps being taken under RERA will ensure a much more transparent and organized industry to work in, thus leading to long term benefits for developers and consumers alike.

Annexure 1:

A sample break up of taxes & government fees for an apartment priced at ₹50 Lacs (assuming cost of land as 50% of total apartment price & 50 dwelling units in an acre for a group housing project in a Tier II city) is as follows:

State Government Taxes & Fees as a percentage of Total Apartment Price: 

• – 6%: Registration of Land
• – 5.4%: Change of Land Use Fee, External Development Charges, License Fee
• – 3%: Value Added Tax
• – 1%: Various Departmental Fees
• – 12%: Stamp Duty on Sale of Apartment

Central Government Tax as a percentage of Total Apartment Price:

• – 4.5%: Service Tax on Sale of Apartment 
• – 3.3%: Income Tax on Sale of Apartment

Total contribution of Taxes & Fees as a percentage of Total Apartment Price: 35.2 % (Approx.)