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Tax free Income from Residential Real Estate

Make money in Real Estate and pay no Income-tax at all! Sounds like a fairy land dream. Not at all. It is a reality. Yes, for all categories of tax payers of India whether they are the Individual tax payers or the corporate giants or it could be a partnership firm or even an AOP or your Hindu Undivided Family here is a golden opportunity for all those engaged in developing and building housing projects to really work on these projects and wait for the tax free income to pour in their sachet.

Well, the salubrious provision to enjoy tax free income comes from the house of the Finance Minister who has in this Budget amended the provisions of the Income-tax Act, 1961 as are contained in 80IB (10) so as to provide for a real liberal tax friendly provision which on the one hand will boost the housing development of the country while on the other hand it will provide for a legal platform to enjoy tax free income to the undertaking developing and building house projects.

The amended provisions of section 80IB (10) of the Income –tax Act, 1961 provide for complete tax exemption in respect of income derived by an undertaking engaged in developing and construction of residential housing projects with a demarcated area. For ready reference the exact extract of the said section 80 IB (10) as amended up to date by the Finance Act, 2003 is as under:-

s. 80 I B (10): =

The amount of profits in case of an undertaking developing and building housing projects approved before the 31st day of March, 2005 by a local authority, shall be hundred per cent of the profits derived in any previous year relevant to any assessment year from such housing project if, -

a. such undertaking has commenced or commences development and construction of the housing project on or after the 1st day of October, 1998;

b. the project is on the size of a plot of land which has a minimum area of one acre; and

c. the residential unit has a maximum build-up area of one thousand square feet where such residential unit is situated within the cities of Delhi or Mumbai or within twenty-five kilometres from the municipal limits of these cities and one thousand and five hundred square feet at any other place.

Thus, in terms of the provisions contained in the Income-tax Act, 1961 as mentioned above, it is really possible to make tax free income in residential housing. The salient features of the scheme to enjoy tax free income in respect of residential housing are as under : -

a. The housing project should be approved latest before 31.3.2005 by a local authority.

b. The commencement of the development or construction should start on or after 1-10-1998.

c. The project of residential housing should be on a minimum area of one acre land.

d. Each of the residential units must not have a built up area in excess of 1000 sq. feet for Delhi & Mumbai towns or in its neighbourhood of 25 kilometers. For other towns and villages the maximum built up area is of 1500 sq. feet.

Thus, from the above discussion we come to the conclusion that to enjoy the tax free income from the housing project the most important condition is that the housing project is exclusively for residential housing, however, it can be in any part of India –whether rural India or in urban India. Another most important condition is that to enjoy the tax free income from residential housing the formal approval of the building plans must be approved from the local authority like corporation or a Municipality latest before 31-3-2005. In case there is a delay in approval, then the benefit of this provision cannot be taken advantage of. The size of the project has to be on a minimum area of one acre but there is no restriction on the upper limit for the size of the plot. Similarly, there is a restriction on the maximum built up area of a residential unit but there is no restriction on the minimum area of each residential unit.

One very important feature of the above tax provision which results into tax free income is that now there is no restriction under the Income-tax Law about the time period by which the residential housing project should be completed. Likewise, there is no restriction about the time period upto which this tax exemption would be available. Thus, the only most important condition to be fulfilled to achieve tax free income from housing sector is to get the approval from the concerned departments latest before 31.3.2005. Hence, after getting the approval if there is a delay in the construction and completion of the project or there is a delay in selling the project then also the benefit of tax free income would not be lost. An intelligent businessmen would be able to enjoy the fruits of this tax provision for five to ten years if he were to take a bigger housing project and just get the plan approved before 31-3-2005 and then if he likes he may complete the project in phases.

To enjoy your share of tax free income from residential housing start acting fast right now, identify the land and proceed to get the plan approved and then just relax to enjoy your tax free income.

The Income –tax provisions as are contained in section 80 IB (10) are really very good and would provide incentive to the business enterprises engaged in developing and building housing projects but there are certain important connected issues and matters which require to be answered by the Ministry of Finance through a separate CBDT circular so that proper momentum can take place, otherwise this important provision will miserably fail to achieve its objective. The issues which require immediate clarification are: -

1. Whether the land owned prior to 1.10.98 but no other activity done on the same would be eligible to the tax concession. The answer should be in the affirmative.

2. What is the meaning of "Built up Area" for the purposes of this section. Ideally it should include within its purview the area as mentioned in the sanctioned plan. The carpet area or super built up area should not be considered although the developer may use this concept for selling the residential units. Ideally the area which is counted for FSI purposes and as certified by the Architect of the developer should be treated as "Built up Area".

3. For limit of 25 Km. from Delhi/Mumbai the clarification should be provided as to how this limit would be arrived at. Logically, the limit calculation should start from the end limit of the city and the distance by car on the motorable road upto the site of the project.

4. The tax exemption speaks of maximum built-up area of each residential unit namely 1000/1500 sq. feet. But, the tax provision is silent on what happens if there are some bigger flats or duplex units. Whether the benefit on the entire project would become taxable. In all fairness the Government should issue a clarification to the effect that tax exemption would be prorata to the units of 1000/1500 sq. feet and higher area unit. The provision as is existing u/s 80HHC with regard to export turnover and local turnover should be introduced for this section to grant tax deduction prorata for residential units for which tax benefit is available and to compute taxable income for units which are of bigger area for which tax benefit is not available.

5. Generally, the local authority permits the developer to construct some local shopping complex and also a club within the complex. The section 80 I B (10) is silent on this point. A clarification should be issued by Central Board of Direct Taxes to clarify their intention. In all fairness the deduction should not be denied merely by construction of a small commercial centre & a club. The concept of prorata tax deduction may be considered.

6. One important condition to avail the tax benefit u/s 80I B (10) is that the project should be approved before 31-3-2005. The government should throw some more light on the terminology "approved". Does this mean approval from different agencies or the approval only from local authority. Going by the intention as can be smelt from the section we feel that this approval would be only from the local authority and that other approvals if any can be got from concerned departments in due course. A clarification should also be issued by the Central Board of Direct Taxes to the effect that the housing project should be approved by 31-3-005 but it would not hamper the right to claim tax deduction on the residential housing project merely if the approved plans of the local authority are revised or resent for some change in the design or style etc. Similarly, in case the plan which is sanctioned say before 31-3-2005 but the same gets lapsed then the new revalidated plan should be treated as valid one because in any case the original plan was sanctioned before 31-3-2005.

7. The section speaks about the approval of the plan before 31-3-2005. But what happens in a situation where for doing a housing project no plan is required and no approval is granted nor rejected by the local authority. The section is silent on this issue. This situation in a practical manner would arise specially if the land on which housing project is to be built up is outside the limits of District Town Planner for which no approval is required for the project. The clarification which is expected from the government should clearly state that for such land it would suffice if the developer submits his building plans and receives a letter from the DTP Office that as the land is outside the jurisdiction of DTP hence no sanction is required.

8. The benefit of this section 80I B (10) whether would be available under builder collaboration agreement to both the parties. Presently, there is no clear cut guidelines on this issue. However, in line with the provisions contained in s. 80HHC where the exporter or even the supporting exporter can enjoy the benefit. Similar provision should also exist in this section which can be clarified through a circular.

9. The government should clarify that during the process of the project the income arrived at by way of interest on loan on deployment of surplus funds would be exempt from tax or not. Going by the spirit of the provision it should be exempted. If the government were to issue a CBDT circular to clarify some of above points then it is expected that the housing sector would flourish to new heights of growth and development in the next five years. Affordable housing can become a reality and the shortage of residential housing can be a thing of the past but only if the government takes out time to address some of the issues concerning the housing developers. The author is tax Investment Consultant at New Delhi for over 35 years.

By Subhash Lakhotia, Income Tax Consultant, New Delhi


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