Budget, Realty And You! By: Santosh Baranwal

Subhash Lakhotia
takes you through the Union Budget and says what it has in store for the Indian investor in realty sector
The Union Budget 2010-11 has brought about significant a m e n d m e n t s, which are going to affect the real estate sector. The first and most important point concerning real estate sector is that the existing income tax deduction in respect of interest on residential house property loan will continue to be allowed as a deduction up to Rs 1.50 lakh. Similarly, the repayment of the housing loan will also continue to enjoy deduction within the existing limit of Rs 1 lakh under Section 80C of the Income Tax Act, 1961.
Building and operating a new 2-star hotel or above as classified by the central government on or after April 1, 2010 would enjoy the benefit of Section 35AD of the Income Tax Act, 1961. This amendment to the said Section 35AD will inspire a large number of taxpayers of India to set up 2-star and above hotels anywhere in India to enjoy the tax benefit. The entire expenditure incurred, wholly or exclusively, for the purposes of a new hotel will be allowed as a deduction in terms of Section 35AD of the Income Tax Act, 1961.
The special feature is that all types of capital expenditure other than expenditure incurred on acquisition of land or goodwill or financial instrument will be allowed as a deduction to the assessee. The impact of this amendment would result into a zero income tax liability for a couple of years for the new hotel, which starts functioning after April 1, 2010. However, there is no condition with regard to the place where the hotel is to be set up. Thus, the business of building and operating a new hotel of 2-star or above category, anywhere in India, which starts functioning after April 1, 2010 would come within the purview of specified business, and as such, would be entitled to deduction even in respect of capital expenditure. There is no restriction even with regard to capital employed and the location of the hotel etc. However, those taxpayers, who would like to take advantage of this section, should remember that they should build and operate the new hotel. This tax benefit will not be available if merely a hotel is built or merely the hotel is operated by a taxpayer.
In another amendment, the threshold limit for tax deduction at source on the rental income has been increased to Rs 1,80,000 per year as against the existing threshold limit of Rs 1,20,000. This amendment will take effect from July 1, 2010. As a result of the proposed amendment, there would be relief to senior citizens and women taxpayers in particular, who receive rent in respect of the property because, now, no tax would be deducted at source on such rental income up to Rs 1, 80,000 in a year.
Amendment has also been made to Section 56 of the Income Tax Act, 1961. This amendment is applicable from October 1, 2009. As a result of amendment to Section 56, any immovable property if received by an individual or a Hindu Undivided Family without consideration, in that case the stamp duty value of such property would be added as an income from other sources. This provision, however, would be applicable only in respect of receipt of such property as gift the value of which exceeds Rs 50,000. It may be recalled here that this provision also existed in the statute book last year but the existing section has been substituted with a small amendment. However, the big amendment which has been made to Section 56, retrospectively from October 1, 2009 and which will have great impact on a large number of taxpayers of India, relates to deletion of existing Section 56(vii)(b)(ii). As per this section, which was introduced through last year's budget, if consideration for property is less than the stamp-duty value of property by an amount exceeding Rs 50,000, then in such a situation, the stamp-duty value of such property as exceeds such consideration would be added as income from other sources in the hands of the individual or an Hindu Undivided Family.
This section was creating a lot of tension in the minds of taxpayers. Hence, luckily, this section has been deleted retrospectively from October 1, 2009. The impact of this amendment would be that if a person buys some property, let us say for Rs 18 lakh and the value adopted or assessed by the state government for the purposes of payment of stamp duty in respect of this property is Rs 24 lakhs – in that situation, the buyer might have paid stamp duty on Rs 24 lakhs even though the sale transaction is of Rs 18 lakh. But in view of deletion of the above provision under Section 56, the buyer will not be subjected to income tax on the difference between the purchase price and the stamp-duty value of the property. Hence, in view of amendment to Section 56 of the Income tax Act, 1961, genuine hardship that might have been caused to the taxpayers has been addressed very well by the budget.
Like any other company, if a real estate private limited company is to convert itself into limited liability partnership, then there will be no liability to capital gains tax because the provisions of Section 47 have been amended by the Union Budget. However, certain procedural formalities have to be complied with to avail tax exemption. One of the most important conditions is that the total sales, turnover or gross receipts of the business of the private limited company, which desires to be converted into a limited liability partnership, should not exceed Rs 60 lakhs in any of the three preceding years and that the shareholders of the existing company become partners of the limited liability partnership in the same proportion as their shareholding in the company.
As per Section 80ID of the Income Tax Act, 1961, profits of a hotel or convention centre in the capital territory if constructed by March 31, 2010, are exempted from income tax. The current budget provides some more time for these facilities to be set up for the Commonwealth Games to be held in October 2010. Hence, amendment has been proposed to Section 80ID to extend the date by which the hotel has to start functioning or the convention centre has to be constructed, from the present March 31, 2010 to July 31, 2010. It may be recalled here that Section 80ID of the Income Tax Act provides for 100% deduction for five years to an undertaking from the business of a 2-star or 4-star category hotel or from a business of building owning and operating the convention centre located in the NCT of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar, Ghaziabad provided such hotel has started functioning or such convention centre constructed during the period 1.4.2007 to 31.3.2010. Now, due to extension of date of July 31, 2010 there would be relief to those persons whose projects have been delayed.
Special provisions for computing profits and gains of business on presumptive basis have been introduced by the Union Budget. The benefit of this amendment can also be taken by all those persons who are engaged in the business of real estate. As per this section, if a person does not keep accounts and has a turnover of Rs 60 lakh, he can opt for computing the income on the basis of presumptive taxation. Hence, for a person with no accounts doing business and having gross receipts of less than Rs 60 lakh, his business income on presumptive basis would be treated as the amount equal to 8% of the total turnover or gross receipts. Likewise, the limit of tax audit has been increased from Rs 40 lakh to Rs 60 lakh. This will also help all those persons who are in the real estate sector. Likewise, the exemption limit for tax audit for professional persons has been increased to Rs 15 lakh.
This will help real estate brokers who are having gross receipts up to Rs 15 lakh, because they would now not be required to compulsorily get their accounts audited. The amendment relating to payment of tax deducted at source by the date of filing income tax return will also help all those who are engaged in real estate business also, because now, as a result of the proposed amendment to Section 40 of the Income Tax Act, 1961 in respect of any sum on which tax has been deducted at source and the same has been paid even by the last date of filing the income tax return, even in that situation, the expense would not be disallowed.
Courtesy:- Times Property dt:- 06-Mar-2010
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Hi
I am Santosh Kumar Baranwal. I am a Graduate. I am working in Bhardwaj
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