What happens when you buy a house?
In India, one of the richest nations in the world, people earn around Rs 1.5 lakh a month from rent, and a whopping Rs 10,000 a month in wages, said Naveen Patil, who heads a housing consulting firm called Naveetan.
He said that this means that a house-buyer in the capital Delhi, for instance, can expect to make around Rs 60,000 per month from his investment in real estate, and about Rs 25,000 from renting.
“It’s a huge savings for the average house-buying family,” he said.
But the Indian government is looking at how to ease the financial burden for households who have to pay taxes on the profits of their properties.
It is currently levying a tax on capital gains, but this is being cut to 8 per cent, making the tax-free rate even higher.
A new proposal is to give tax-exempt interest income on the capital gains to households who own houses.
This could also boost the income of some property owners who have no intention of selling, said Manish Bhattacharya, a senior economist at the National Institute of Finance, who is also a member of the Planning Commission.
Bhattaharya said that the government could reduce the tax on profits from 30 per cent to 5 per cent.
“If we can make the tax exemption for people who own a house as high as 10 per cent and the capital gain exemption from 5 per percent, then we could end up with a net benefit to the Indian economy,” he told Al Jazeera.
“In the long run, this could be huge.”
Bhattam’s proposal could mean that a large proportion of the tax revenue from the tax cuts would be spent on housing construction, which has been seen as an important part of the government’s housing agenda.
In a report published last year, the National Sample Survey Office said that about 45 per cent of India’s 1.7 billion households had a home valued at more than Rs 1 lakh.
This meant that about 70 million households in India have not paid taxes on their capital gains.
The report said that India’s population is expected to grow to about 40 million by 2045.
It expects a population of over 50 million by then.
Bhanu Mehta, the president of the India Institute of Planning and Development, told Aljazeera that the tax proposals are likely to generate a huge amount of tax revenue for the government.
But, he said, it will not be enough.
“We are seeing that in India the biggest beneficiaries of the GST are the urban poor.
They are getting a lot of tax relief from the new policy,” he noted.
Mehtas plan for a tax cut in real-estate tax is to eliminate the tax that was collected on the purchase of properties in the first place, and instead give a deduction for the value of the property as income.
He told Aljeet that his plan is to encourage property investors to put down a larger proportion of their net income in real property.
In his report, Mehts office also found that property developers in the city of New Delhi and in neighbouring Jammu and Kashmir are taking advantage of the new tax measures to pay down debts.
The average real estate investment in India is around $3 billion per year, with most of this being in the Delhi and Mumbai areas, according to Mehti’s report.
“This is happening because the tax rules are very lax.
Developers are not paying any taxes on profits, and are taking a large deduction from the cost of real estate,” he added.
“They are making big profits by investing in land and building luxury properties.”