Housing Finance Sector

Enhancement of limit for deduction of interest paid on housing loans under section 24(2), from the present Rs 100,000 to Rs 150,000.

In respect of repairs of, and collection of rent from the property, amount of 30% (from the current 25%) of the annual value of house property is allowed as a deduction u/s 24(1)(i).

Rebate u/s 88 increased to 30% of the amount invested from the current 20% for the salaried employee having salary of less than Rs 100,000.

Removal of surcharge on income tax.

FII limit increased to 49% from the current 40%.

Automatic foreign direct investment in non-banking finance companies allowed up to 100%.

Dividend tax reduced to 10% from the current 20% (including surcharge).

Limit for TDS on deposits reduced to Rs 2,500 from the current Rs 10,000.

Sops to housing finance industry: The concessions given by the previous two budgets have already started paying rich dividends. The industry is growing at a CAGR of 30%. This kind of growth rate is also likely to have a positive impact on steel and cement sectors. The disbursals of 29 housing finance companies increased from Rs 75 bn in FY99 to Rs 127 bn in FY00. The disbursals in FY01 are expected to touch RS 170 bn mark.

Tax incentive to individual investors: Increasing the rebate limit under section 88, and removal of surcharge is likely to spur demand from the retail investors for housing loans.

Increase in FII limit: This is positive for the housing finance major HDFC as the current FII limit in the company has already reached to around 36%. They can now invest more without the RBI's permission.

Reduction in dividend tax: This is likely to add gains to the bottomline of finance companies paying high rate of dividend.

(Rs m)	No. of shares (m)	Dividend per share (Rs)	Tax savings	% addition to net profits
ICICI	785	5.5	518	4.3%
HDFC	119	10.0	143	3.0%

TDS on deposits: Currently if the interest on deposits exceeds Rs 10,000 tax at the rate of 10% will be deducted. The government has now reduced this limit to Rs 2,500. As a result investors could divert their funds from fixed deposits to mutual funds to save the tax.

The chiefs of financial institutions IDBI, IFCI and HDFC have recommended the government to differentiate between the volatile interest rate and fixed rate of interest, to bring down the cost of funds. They indicated that interest rate should not merely be linked to inflation rate and other factors should be taken into considerations.

Extension of fiscal incentives to the housing sector. This will not only benefit the construction industry but also create a strong demand for the core sector industries like steel and cement.

NBFCs should get reduction in respect of doubtful assets on the same terms as banks.

Increasing the capital limit for small-scale sector to Rs 30 m and to launch a domestic futures market in gold.

To fuel the growth of housing sector apart from government support, it is imperative for the financial institutions to mobilise greater household and corporate savings for infrastructure finance in the form of infrastructure bonds.

The amount of rebate u/s 88 should be extended from the current Rs 80,000. An increase in the limit should be related to the investments in the form of infrastructure bonds. This is expected to provide higher incentives for investing in these instruments. Also, considering the fact that a major demand for housing loans has been from the retail investor, increased tax benefits in this segment could act as a demand driver for the housing sector.

The housing industry also expects the enhanced limit for deduction for interest paid on housing loans under section 24(2), from the present Rs 100,000 to Rs 125,000.

Inclusion of housing loans in the banks’ priority sector lending criteria.

100% tax holiday for 15-20 years on social infrastructure involving rural housing, urban & rural sanitation, drinking water supply and waste management projects can therefore be considered.

Remove the anomalies between the sections 10(23) G and 80IB. Section 10(23) G allows a tax holiday on loans and investment in infrastructure projects of five years duration. According to section 80IB, a housing project would qualify for an infrastructure project if among the other things it is started after October 01, 1998 and completed by March 2003. This affectively means that the project has to be completed within four and a half years time.

Amendments to section 80HHC of the IT Act to enable builders and developers to sell properties to non-resident Indians and bring convertible foreign exchange. Currently, foreign exchange earned from sale of flats to NRIs is taxable. With the amendment, it is proposed to offer 100% exemption to such transactions.