Buying homes: Why tax policies need a tweak
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Mumbai: India’s income tax system is built in favour of the non-salaried rich. One facet of this is income tax laws encouraging investment in real estate. Many investors buy residential homes and then keep them locked. They drive up home prices and a few end up cornering a good chunk of the residential real estate market. They also make renting difficult. And this is not environmentally friendly as well.
Mumbai: India’s income tax system is built in favour of the non-salaried rich. One facet of this is income tax laws encouraging investment in real estate. Many investors buy residential homes and then keep them locked. They drive up home prices and a few end up cornering a good chunk of the residential real estate market. They also make renting difficult. And this is not environmentally friendly as well.
Given these reasons, income tax laws that incentivize investing in real estate need to be rewritten. The agenda can perhaps be set with the interim budget which is due on 1 February and then moved further once the budget for 2024-25 is presented in July after the Lok Sabha elections. In this piece, we will look at why this needs to be done and what exactly the government can do.
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Given these reasons, income tax laws that incentivize investing in real estate need to be rewritten. The agenda can perhaps be set with the interim budget which is due on 1 February and then moved further once the budget for 2024-25 is presented in July after the Lok Sabha elections. In this piece, we will look at why this needs to be done and what exactly the government can do.
Take a look at the chart. It plots two curves. The ratio of priority home loans given by banks to overall home loans and the ratio of non-priority home loans given by banks to overall home loans.
Now, before we analyse the chart, it’s important to state a few things. First, priority sector home loans are defined as: “Loans to individuals up to ₹35 lakh in metropolitan centres (with a population of 1 million and above) and up to ₹25 lakh in other centres… provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹45 lakh and ₹30 lakh, respectively.” The remaining home loans are non-priority home loans.
Second, home loans in India are given by commercial banks and housing finance companies. As per the National Housing Bank’s Report on Trend and Progress of Housing in India 2022, as of March 2022, of the total outstanding home loans of ₹25.11 trillion, 68% were distributed by banks and the remaining 32% by housing finance companies. As of 1 July 2023, HDFC, the largest home finance company, merged with HDFC Bank. With this merger, the share of banks in the total home loans distributed crossed more than 80%. Given this, the home loans given by banks are now an even better representation of the home loan…
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