Rental Reforms Redefine the Indian Real Estate Sector
Anuj Puri, Chairman – Anarock Property Consultants
Several breakthrough reforms with pertinence to the Indian real estate sector saw the light of the day over the last one year. Be it demonetization – the Government’s ‘surgical strike’ against black money - the revolutionary RERA or the unified tax regime of GST - all bore the power of rendering the Indian real estate sector more transparent and professional.
The upward trajectory of consumer sentiment is a strong indicator that the market has responded well to these reforms. The incumbent Government has embarked on a determined journey to transform the Indian realty sector into a more wholesome industry.
While the primary and secondary residential markets undoubtedly benefited from the plethora of reforms, the rental market has also received a shot in the arm. Various reforms and announcements made over the last one year can potentially boost this crucial segment of the Indian real estate sector:
April 2017: An End to Fake Rent Receipts
Under Section 10(13A) of the Income Tax Act, employees can avail tax exemption under House Rent Allowance (HRA). Hitherto, employees merely needed to submit rent receipts to avail this benefit, along with the landlord’s PAN details if the rent amount exceeded Rs 1 lakh per annum. However, with its decision to cap the loss on second property purchased with a home loan, the Government has effectively plugged a tax loophole used by innumerable employees for tax exemption. As per the recent tribunal ruling, the assessing officer can now demand proof – such as the leave and licence agreement, and a letter to the housing co-operative society informing about the tenancy, electricity bill, water bill, etc. This new ruling has cracked down on the practice of salaried employees submitting sham rent receipts.
June 2017: Withholding Tax
The new section (194IB) introduced in the Income Tax Act makes it mandatory for individuals paying monthly rent of more than Rs 50,000 to withhold taxes at 5% on rental payments, and to deposit this amount within a prescribed time. Prior to this amendment, individuals were not required to withhold such tax. This new section has been inserted to widen the scope of TDS (tax deducted at source).
With this, landlords receiving higher income as rent will come under the tax scanner. They will now be liable to report the full rental income in their tax returns in order to claim benefit of the TDS amount. Moreover, with the recent linking of PAN and Aadhar numbers, the chances of malpractices going unnoticed have reduced drastically. The winds of change have clearly started to blow post-demonetisation. Both tenants and landlords now prefer to keep their transactions clean by not indulging in any cash payments. Moreover, tenants have also become more vigilant regarding the rental agreement and rent receipts.
July 2017: Model Tenancy Act
To replace the obsolete five-decade old Buildings (Lease and Rent Control) Act, the State Cabinet of Tamil Nadu announced its intention to bring in a law based on the Model Tenancy Act circulated by the Central Government. The new law aims to balance the rights and responsibilities of both the landlords and tenants.
Some of the salient features of the law:
- Mandatory registration of all rental agreements over 11 months
- Restriction of security deposit amount to three months’ worth of rent
- Limiting of tenants’ right to continue residing after the lease period to six months.
With a balanced law in place, many more home owners are expected to come forward and let out their properties.
Why Has Rental Housing Not Taken Off?
Despite its immense potential as a market force, why has the Indian rental housing segment has not made consummate headway? The primary reason is that it is a largely unorganised sector, and developers do not find building project exclusively for rental purpose a very viable business proposition. Moreover, the cost of building a house is way higher than the rental returns they can expect, considering the rental yields that Indian cities fetch.
Also, historically, the stringent pro-tenant laws of the State-enacted Rent Control Acts (RCAs) have prevented landlords from renting out their properties. The Tamil Nadu government is now paving a way for a balanced rent control act. Also, a fast-track court mechanism to handle eviction disputes is expected to revive the rental housing market in India. Repealing rent control will boost the confidence of property owners with an eye on rental returns, and thereby help unlock vacant units.
What More Needs to Be Done?
Over the past few years, the country has seen a cultural and socio-economic shift. From 5.5 million to 9 million a year, migration of people in pursuit of better education and career opportunities in Indian cities from rural and peri-urban areas has almost doubled in the last ten years. This directly pushes up the demand for rental housing.
Also, it by now is an emerging market reality that many of India’s millennials prefer to rent rather than buy homes - largely because the property prices in most of the metropolitan cities are not affordable, and also because the rental option can provide better location advantages. Apart from the economic factors, rental housing comes with the benefit of ease and flexibility for the fast-paced Ola and Uber generation.
The Government, with its ambitious ‘Housing for All by 2022’ mission, is also half way through its tenure, and the pace of housing construction is still far behind schedule. It is a distinct Indian paradox that despite the acute housing shortage, approximately 11 million units lie vacant and unused. Clearly, efficient use of this existing inventory via rental housing (in markets where trunk infrastructure is in place) would ease some of the pressure.
In fact, the draft National Urban Rental Housing Policy aims to alleviate housing shortage in urban areas by encouraging renting out of these vacant homes across the country. Residential REITs can also ease the mounting unsold inventory, as they have done in countries like the United States.
The Central Government is now planning to launch a ‘rent to own’ scheme under the National Urban Rental Housing Policy which will let people rent homes from Government institutions. Under this scheme, people will have the option to buy the home they have rented by paying the full price in easy instalments.
While the Government has started the engine, it is now high time to floor the accelerator and fully explore and unbox the massive potential of rental housing in India…