NEW DELHI: Those planning to buy their first house should rush and complete the formalities by March 31 to avail of the additional tax benefit against the interest paid on a home loan. That’s because an exemption available to taxpayers will lapse in the current financial year which enables them to reduce the interest paid from the taxable income. The reduction can be up to Rs 1.5 lakh under section 24 of the Income Tax Act and up to Rs 1 lakh under section 80EE against the interest paid on home loan.
The benefit under section 80EE can be availed only to buy the first house of a value of Rs 40 lakh, provided the maximum loan amount is Rs 25 lakh. The second provision is due to lapse. But those who have already borrowed need not worry. The provision was introduced in the 2013-14 budget, although the benefit was available only for a year to provide a much-needed impetus to housing, which has been hit by rising interest rates and falling real income levels.
In the Vote On Account presented on Monday, finance minister P Chidambaram decided not to amend any direct tax provisions, many of which are due to end on March 31, 2014. Although the next finance minister has the option to reintroduce the benefit, it may not be available for the first three-four months of 2014-15. Similarly, the benefit of income tax rebate to companies which are involved in power generation and distribution will also lapse. The provision of lower dividend tax paid by Indian companies on dividend received from foreign companies will also lapse on March 31, 2014.
Executive director (taxation) of PWC India Kuldeep Kumar said that the benefit under section 80EE was very helpful to those who were buying their first house. He said that if the interest payable during a year is less than Rs 1 lakh, the unclaimed amount will be allowed to be claimed in the next financial year. The benefit was also allowed during the construction period.
With this provision, one could avail a deduction of Rs 2.5 lakh from his taxable income against the interest paid on home loan.
After the provision lapses, the first home buyer, falling under 30% bracket, will lose Rs 30,000 and those who are under 20% bracket will lose Rs 20,000.
Some financial institutions are now offering special home loan rates for women. A look at this trend…
Since late 2013, several home financiers like State Bank of India and LIC Housing Finance have promoted time-bound schemes to lure the woman borrower with discounted loan rates for home purchases. Some shaved off 5 basis points or 0.05% from their rates to woo India’s women borrowers. And now, Tata Capital Housing Finance (TCHF) has joined the ranks with its discount scheme, which offers them home loans of up to `40,00,000 at a discounted rate of 10.15 per cent vis-a-vis its present rate of 10.50 per cent for male borrowers. If you intend to take a loan from Tata Capital Housing Finance of up to `40,00,000, it helps to be a woman. You can expect to save as much as `864 a month on a 15-year loan and `935 a month on a 20-year loan. And if you add this up, even without accounting for the interest the money saved might earn over the loan period, you stand to save between `150,000 and `225,000 over 15 to 20 years. That’s a tidy sum. However, the picture changes dramatically once you start comparing home loans offered by some of the other large home financiers who are offering loans up to `75,00,000 at a gender-neutral rate of 10.25%. The attractiveness of TCHF’s ‘woman only’ offer fades. Savings per month crimp to `267 and `246 a month for 20-year and 15-year tenures. What you save over the tenures, without taking into account opportunity cost, also dwindles to between just over `44,000 to `64,000, respectively.
Compared with other lenders, the offer seems far less enticing, but if you want to make the most of any discounts you can get, go ahead. You have till March 8 to grab this offer. To avail this facility, the property must be in the single/joint name of the borrower and the borrower must have income to support the EMIs.
Your bank may be disbursing home loans without due diligence of realty projects. So don’t be lax in checking out the builder’s credentials
If you believe that the project in which you have booked your flat is free from all the issues just because your bank has cleared your loan application and approved the required amount — then it’s time to think again.
While many buyers think that the lending bank usually carries out all the checks before approving loan for a project, the reality is very different. It has been seen that banks are not doing enough to gauge the authenticity of housing projects before disbursing loans.
There have been numerous cases in which loans have been sanctioned for projects for which the builders did not have licenses to develop residential colonies. Banks have even been found to have cleared loans to two or three persons for the same flat in the NCR.
Hair raising accounts
Relating one such incidence Ashish Kaul, Vice-President of the Federation of Apartment Owners’ Association, Greater Faridabad, says that home loans had been sanctioned for about 80 per cent units in a society with 10,000 apartments even though its building plan had not been approved by the district town planner, Faridabad. Kaul got this information from a RTI reply. Shocked over the apathy of the banks, Kaul has not only complained to the Reserve Bank of India against the banks’ lack of due diligence in the Greater Faridabad case, but has also filed a PIL in the Punjab and Haryana High Court against what he calls the massive violation of the Punjab Scheduled Roads and Controlled Areas Restriction of Unregulated Development Act, 1963, which regulates building plans in plotted colonies.
Meanwhile, more than 400 persons have been cheated of amounts ranging from Rs 25 lakh to Rs 35 lakh after they fell prey to the promise of Shiv Kala Charms. They found that “their” apartment had been sold to multiple buyers and banks had granted overlapping mortgages on them. Mahipal Singh, Managing Director of NCR-based MMR group, admits that what has happened with the customers of Shiv Kala Charms has badly shaken the prospective investors in real-estate. “I feel that it is high time real companies either change or perish. Those realty firms who try dupe their customers can not survive in the market.”
Prominent among these lenders are banks such as Axis, Oriental Bank of Commerce, Syndicate Bank and housing finance companies such as HDFC, LIC Housing Finance Limited (LICHFL), Dewan Housing Finance Corporation Limited (DHFL), Punjab National Bank Housing Finance and Indiabulls.
On August 31, 2011, HDFC Bank came out with a list of 78 apartments in Shiv Kala Charms, stating that these had been legally mortgaged to the bank. This opened a can of worms. Buyers who had either taken loans from other banks or organised finances on their own were shocked to find their apartment numbers listed by banks with which they had no dealings.
Among those who took notice of this list was Avneesh Kaushik, who filed a case against the developer in the economic offences wing (EOW) of Delhi Police. Kaushik bought apartment number 2093 on the ninth floor of tower 2 in the project in January 2008 with a home loan from Syndicate Bank. Unknown to him, the developer had sold the apartment to another buyer who was granted finance by LICHFL.
It may be recalled that Shiv Kala Charms is a part of a cooperative society, Golf Course Sahkari Awas Samiti Ltd, which was formed in 2004. The society leased 9731.79 square meters of land from the Greater Noida Development Authority (GNIDA). In latest to this case, the Economic Offences Wing (EOW) of the Delhi Police has arrested a 47-year-old builder for allegedly cheating investors of a housing project in Greater Noida. The accused had allotted over 300 flats in a housing project that proposed availability of only 140 flats.
The arrest came after those who had invested money in the project named ‘Shivkala Groups’ lodged complaints alleging that the company —Golf Course SahakariAwas Samiti — cheated them on the pretext of a pre-launch project.
During investigations, the police found that multiple allotments of flats were made and financial institutions had advanced more than one loan on the same flat, but to different persons. There were also allotments in respect to non-existent flats.
Reasons for lapses
Banks fail to carry out checks due to a number of reasons. According to a banking expert, “One reason is the nexus between a developer and a bank agent. Banks are in a dominant position to bully gullible homebuyers and so overlook safety norms knowing that it is the vulnerable buyers who will bear the brunt in case of a problem at a later stage.”
Sanjay Khanna, Delhi-based director of Kailash Nath Projects says, “A buyer should be extra cautious and check all the necessary approvals that builders require before launching a project. Things are so messy in the realty sector as there is no regulatory authority to look into these issues.”
There is also a feeling that many times banks disburse loans as they depend to a large extent on the legal advice outsourced to legal firms. Banks need to develop domain experts.
The moral of these two stories are that would be buyers of flats need to be very careful in investing in any project.
Hopes of a minor fall in interest rates, especially on home loans, were dashed last week after the RBI hiked its key rates in its policy review. Home loan borrowers, especially those crushed by a heavy EMI, have been looking at the RBI for some solace for a while now.
Generally, borrowers can do very little other than prepaying a part of the loan (if they have surplus cash) to reduce the interest burden or increasing the EMI (if they can afford it) to reduce the tenure and therefore, the overall interest paid.
However, some experts believe home loan seekers and existing borrowers looking to switch lenders can consider experimenting with some out-of-the-ordinary home loan schemes. Such loans, which are linked to an overdraft facility, are offered by SBI, HSBC and Standard Chartered, among others.
Citibank offers a home loan scheme that is a combination of a simple term loan and a credit line facility. However, most people are unaware of the existence of these schemes, as they are not promoted heavily.
“Such schemes can prove to be very useful, but the borrower needs to understand the product’s workings carefully before going ahead,” says Vipul Patel, director of mortgage advisory firm Home Loan Advisors.
Unlike regular home loans which are standard offerings, features of these products vary with each bank. The only thing that is common among them is the home loan is linked to an overdraft facility. Any surplus money (apart from EMI) you deposit into the account will reduce the principal outstanding (only for the purpose of calculating interest), thus reducing your interest outgo.
You can also withdraw the surplus amount parked in the account, if required, though you may have to pay the applicable transaction charges per withdrawal. Again, it depends on the bank’s policy.
“The deposits into the account actually offset the interest payable for that many number of days and, as a result, reduces the loan tenure as also the interest paid over the term of loan. This is more tax-effective as interest saved (savings) is not taxable, while income is,” says Patel. That is, if you were to invest the amount in fixed deposits, the interest earned would be taxable. If used efficiently, it can reduce both your loan’s tenure and the interest paid.
While it may sound like a win-win deal, there is a flipside to these products. Most importantly, they charge at least 0.25% more than a regular home loan. For instance, HSBC’s Smart Home’s rate is 0.25% higher than its regular home loan. Moreover, some banks also levy an annual fee of up to 1% of outstanding balance or loan amount, which is quite substantial.
“You need to carry out a cost-benefit analysis to ascertain whether a simple part pre-payment is better than depositing surpluses,” says VN Kulkarni, chief credit counsellor, Abhay Credit Counselling Centre. Instead, it might be wiser to go for banks that charge an interest rate as low as 9.5%, he reasons.
Simply put, you will benefit from these products, primarily if you direct all your savings into this account and are confident of parking a surplus. That means, it is not going to help if you are stretched for paying the basic EMI itself.
The stage seems to be set for the real estate sector to take a turn for good times again. When everyone expected a rate hike in the Reserve Bank of India’s policy review on December 18, the central bank surprised all with a status quo on rates. Another bonanza soon followed: State Bank of India and HDFC, the top two home loan providers, slashed home loan interest rates between 30-50 basis points.
Both these unexpected moves have rekindled hopes in the struggling real estate sector at a time when housing demand remained largely stagnant across major urban markets in India. The sector of late has been witnessing end-user perceptions of inflated housing prices, as well as high borrowing costs that kept off home buyers. In fact, subdued demand levels have even led to a price correction of around 10-15 per cent across some markets in India.
According to an estimate from Knight Frank India, owing to weakening demand, new launches in Mumbai, the largest market in India, plummeted over 40 per cent compared to peak levels in 2010 as developers shifted focus on liquidating current inventories.
“Mumbai’s unsold inventory level is almost 44 per cent in comparison to NCR (New Delhi Capital Region) which stands at 26 per cent even with twice the number of units under construction. Nearly 2,90,000 residential units are under construction in Mumbai while unsold inventory levels are close to 1,30,000 (ready as well as under construction),” it says.
“We are pleased that major banks in India have decided to lower the home loan interest rates to new customers. This is a positive move to boost property sales and spur industry growth. Home buyers who were earlier waiting for rates to come down will now certainly look at buying their dream homes,” said Lalit Kumar Jain, Chairman, Confederation of Real Estate Developers’ Associations of India (CREDAI).
“From the perspective of the real estate industry, high inflation coupled with muted income growth has already made a dent on consumer affordability. At least a status quo on key policy rates will serve as a breather for households and leveraged developers alike,” said Samantak Das, chief economist and director-research, Knight Frank India.
Industry veterans say that the cut in home loan rates by banks has occurred after nearly a year, and will augur well for investment sentiments in the market. “If home loan interest rates go down further, home buyers and realty investors — especially in the housing market — will be encouraged to make purchase decisions. Going forward, the RBI may be expected to maintain stability or reduce base rates. All in all, a positive signal for the investment climate in India’s realty sector; and a likely indication of a gradual economic recovery,” said Anshuman Magazine, Chairman & MD, CBRE South Asia.
However, a big worry for the real estate sector is will the good times last? The RBI Governor has said the central bank was waiting for more data, which means if inflation rises, it could start hiking again. “It is good that RBI has decided to resist the temptation of raising the rates. This may provide a temporary relief. It still leaves a hanging sword by postponing the decision to next month. It has been established that the government has not been able to bring down the inflation, particularly the food inflation despite bumper food production. We believe that emphasis needs to be given to initiatives that will result into growth,” said Sunil Mantri, president of the National Real Estate Development Council (Naredco).
Real estate players are keeping their fingers crossed with a prayer on their lips — that inflation should come down and the RBI should not raise rates again.
Welcoming the 0.25% rate cut by two of the biggest home loan financiers SBI and HDFC, realty sector participants today said the move will help revive interest in the gloomy market.
“This is a positive move to boost property sales and spur industry growth. Home buyers who were earlier waiting for rates to come down will now certainly look at buying their dream homes,” industry body Confederation of Real Estate Developers Association of India (Credai) Chairman Lalit Kumar Jain said.
“The home loan rate cuts from certain banks have occurred after nearly a year, and will augur well for investment sentiments in the market,” property consultant CBRE South Asia’s Chairman and Managing Director Anshuman Magazine said.
It may be noted that the residential sector had suffered a major set back due to increasing home loan rates, which had forced buyers to postpone their home buying decision.
Magazine also welcomed Reserve Bank’s move to hold on to its key rates despite the high inflation, which resulted in the rate cut announcement by SBI and HDFC last evening. He said the move is a positive signal for the investment climate.
SBI, the country’s largest lender, first announced a rate cut of 0.25% in its home loan rates yesterday, forcing HDFC, the second biggest home loan financier, to respond.
The move came a day after the Reserve Bank of India kept its key policy rates unchanged. The short-term lending rate was kept unchanged at 7.75%, while the cash reserve ratio (CRR) remained at 4%.
According to watchers, the lenders were also enjoying a reduction in provisioning for some time, which will now get passed on.
SBI home loans will now be available under two slabs — under Rs 75 lakh and above Rs 75 lakh. SBI loans of up to Rs 75 lakh would now be available to fresh borrowers at 10.15% as against HDFC’s 10.25%.
SBI has also given an additional concession of 0.05% to women borrowers, after which the borrowing rate will be 10.10% for home loans of up to Rs 75 lakh.
In his first full-fledged review of the monetary policy, Reserve Bank of India (RBI) Governor Raghuram Rajan stuck to the continuing hawkish stance of inflation control first, which has seen the repo rate go up by another 25 basis points. The repo rate is the rate at which the central bank lends money (liquidity) to the financial system, and is the key policy rate. After the RBI action on October 29, it stands at 7.75 per cent.
The most rate sensitive sector that always watches the central bank’s action closely is real estate. Equated monthly instalments (EMIs) are the biggest expense for a typical household, and with the floating interest rate regime, any increase in the policy rate has a potential effect of pushing EMIs upward, although it is banks that take the final call.
This time, the RBI’s review of the monetary policy has coincided with the festive season an important period for the real estate sector, for most home buyers seal the agreement for purchase typically during the second half of the calendar year, which is when most festivities take place.
The real estate sector is saddled with huge inventories, stretching up to four years — that is the time it would take to offload all those apartments at the current absorption rate.
“Pan India inventory is now well above the comfort level of 14-15 months. Mumbai has an inventory of close to 48 months, Delhi of 23 months and Bangalore of 25 months. These are close to the levels of 2007, when the residential real estate market inventories were at an all-time high,” says Santhosh Kumar, CEO-Operations, Jones Lang LaSalle India.
Projects are routinely delayed and funding is starved as the cost of liquidity is high. As a recently released report by global property consultant Knight Frank put it, “The ailing real estate developers have been caught in the trap of ambitious expansion, decelerating sales, hardening interest rates and weakening cash flow.”
Given this already bleak scenario, what is the likely impact of the latest inflation control measure of the central bank? As most industry players put it, not very good.
“Prospects for the real estate industry are already muted due to high interest rates and high cost of construction. This is acting as a dampener on consumer sentiment in the run-up to the festive season,” says Brotin Banerjee, managing director and CEO, Tata Housing.
“Since the mid-quarter review in September, global economies have shown firming up of activities and as a result, Indian exports have shown an upward trend. Additionally, the exchange rate has shown stability and agricultural output is expected to improve even further, in the coming months. Keeping this in view, the central bank could have adopted a wait and watch approach by deferring the repo rate hike. This could have helped various sectors including real estate to capitalise on the positive consumer sentiment ahead of the festive season to propel growth,” says Samantak Das, chief economist & director-research, Knight Frank India.
According to a just-released research report by global property consultant Cushman & Wakefield, during the six months from January to September, 1,32,084 residential units were launched across the country, which is a 5 per cent increase when compared with the same period last year. When compared on a quarterly basis, however, the three months ended September have witnessed a fall in launches by 7 per cent. As against this, the net absorption for the first six months have dipped 15 per cent across the country. For Mumbai the figure is negative 28 per cent and for NCR it is negative 41 per cent.
The fall in absorption levels are complemented by price levels that are trending towards moderation. The latest instalment of the Residex of the National Housing Bank that track home prices across 26 cities has shown that prices have moderated in key metropolitan markets while some tier II cities have shown a drop.
The RBI’s own findings in its ‘Macroeconomic and Monetary Developments’ for the second quarter also point towards this trend. The RBI’s house price index for the first quarter of the current financial year (April-June) was lower at 0.89 per cent at the all India level, when compared with the preceding quarter. For Delhi, the index stands at 0.79 per cent lower, when compared with the previous quarter, a steep fall for the index stood at 6.18 per cent in the December-March quarter of 2012-13. For Mumbai, the index is lower by 0.28 per cent.
Given this scenario, the latest increase in the policy rate would make the prospective home buyer adopt even greater caution.
“For the realty sector, the upward revision in repo rate by the RBI is likely to increase pressure on developers, who are already struggling to raise funds for construction amidst reduced lending from banks. From the consumers’ perspective, this revision will also affect the sentiments, as retail loans may become costlier. Because of subdued sentiments, sales have already dropped across regions. This will impact the new prospective buyers too, as uncertain economic conditions have made them cautious. As a result, these buyers are already taking longer time to decide on a particular investment,” says Sachin Sandhir, MD, RICS South Asia.
This festive season has seen subdued consumer sentiments overall. Footfalls at malls have fallen and crowds at markets have reduced to a trickle. Given the latest salvo from the central bank, enquiries at sales offices would drop further. For the consumer, it is once again wait-and—watch on interest rate and prices.
The developer, tough, is at the crossroads: freebies and discounts fail to entice if prices are high, and that can work only if the customer shows up, which in the current environment is more unlikely.
That time could stretch further for all eyes are on the moves by the banks. Thus far, there have been no indications that loan rates would go up. “The increase in repo rate will hopefully not result in an increase in home loan interest rates. Even a small rise at this point could dampen the festive sentiments of home buyers and will not auger well for the industry,” says Anshuman Magazine, CMD – South Asia, CBRE, a property consultancy.