One thing that Jaitley can do to control speculation in real estate

Feb 10, 2015

- By Vivek Kaul

Vivek Kaul
In response to yesterday's column I got an interesting email from a reader. The email has prompted me to write another column on real estate.

Talking about the budget presented by the Narendra Modi government in July 2014, the reader said: "The most detrimental thing that the government did was hike the deduction limit from Rs 1.5 lakh to Rs 2 lakh!!!"

The finance minister Arun Jaitley had said in his budget speech: "Housing continues to be an area of concern for middle and lower middle class due to high cost of financing. Therefore, to reduce this burden, I propose to increase the deduction limit on account of interest on [home] loan in respect of self occupied house property from Rs 1.5 lakh to Rs 2 lakh."

This should not have been done the reader suggested, as it leads to more speculation in real estate. As he wrote in his email: "Even in Vasai or Virar or any other distant suburb from where people come to Mumbai to work, flats are not cheap." What makes the situation worse is the fact that "people with high incomes living in Mumbai invest in such distant suburbs to avail tax benefits and capital appreciation."

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What the reader was basically saying is that individuals who already own flats and are living a comfortable life in Mumbai, buy "cheaper" flats in suburbs to avail tax benefits. I am sure something similar must be happening in other cities as well.

At the same time such individuals hope to make capital gains from the purchase in the years to come, as real estate prices keep going up. With more money chasing the same number of flats, prices go up. This makes flats more expensive for people who want to buy and live in them.

While the reader has got the speculation bit right, he has got the tax part of it wrong. It doesn't make any sense for an individual to buy a flat for the sake of investment, so that he can get a deduction of Rs 2 lakh on it and save Rs 61,800 in the process (assuming he comes in the top tax bracket and pays a total tax of 30.9%).

The amount is too small to be taking on the headache of owning a flat in a distant suburb. Further, chances are that the individual would be already repaying a home loan for the flat that he lives in. Hence, he can't take the same deduction for two flats.

Nevertheless, it would still make sense for an individual looking to buy a flat(and this need not be limited to just one flat) for investment purposes to go ahead and save money in the process.

In fact, the Income Tax Act actually encourages people to speculate in real estate. There is no restriction on the number of homes against which a tax payer can claim a tax deduction on the interest paid on the home loan to fund the property. Only one of these properties needs to categorized as a self-occupied property. On this self-occupied property, an interest of up to Rs 2 lakh can be claimed as a tax deduction.

This limit applies only to the self-occupied property and not on other homes that a tax payer may choose to buy. Any amount of interest paid on home loans can be claimed as a deduction as long as a "notional rent" is added to the income. We all know that these days "rents" are relatively low in comparison to the EMIs that need to be paid in order to repay the home loan.

Hence, the interest component tends to be massive during the initial years and helps people with two or more homes, claim huge tax deductions. This was the point that the reader who sent in an email was trying to make, even though he got the tax deduction part wrong.

This "deduction" has been used over the years by well paid corporate employees to bring down their taxable income. Further, individuals who use this deduction benefit on two fronts-tax deduction as well as capital appreciation. Even if, the capital appreciation is not huge, such individuals are happy in claiming just the deduction than actually making money from an increase in price. Hence, they may not sell the flat, even in a scenario where prices may be falling.

While offering a tax deduction on a self occupied property makes some sense, there is no logic to offering a tax deduction on a home, one is not living in. This "deduction" needs to be plugged immediately as it encourages speculation.

Arun Jaitley has an opportunity to do a huge favour to the people of this country by removing this deduction in the forthcoming budget. Whether he goes around to do that will only become clear once the budget is presented on February 28, later this month.

Postscript: I had written in a column last week that I would be surprised if the economic growth for this financial year would be greater than 7%, as per the new method of calculating the GDP. Data released yesterday by the ministry of statistics and programme implementation suggests that the Indian economy is likely to grow by 7.4% during this financial year. Turns out I was wrong in writing what I did.

As per the old method of calculating the GDP the economic growth during this financial year was supposed to be at 5.5%. No reasonable explanation has been offered for this jump in growth. At the same time other high frequency data like bank loan growth, corporate profitability, stalled projects, massive slowdown in collection of tax revenues etc., seems to suggest that the economic growth should be more around 5.5% than 7.4%.

I will keep track of this and in the days to come will try and come up with a possible explanation for this huge difference in the two numbers.

What are the other steps that the government can take to bring down speculation in real estate? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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11 Responses to "One thing that Jaitley can do to control speculation in real estate"


Feb 12, 2015

One thing we need to consider here while taking off tax benefit on the property where the person is not living. People tend to buy house/appt in their home town or the place where they are planning to stay in future, while working in another place and paying rental, if the proposed system to be in place then these people will be loosing tax benefit, does this mean the people should buy property in the place where they work, whether they plan to stay there at later stage or not, the job may be transferable, in such case, how this will be tracked.



Feb 12, 2015

To control real estate prices, Capital gains tax on sale of real estate should be increased to 50%.

Real estate is essential part for all Indians.There should be no speculation. Only actual users should buy the flats.If you speculate , one should pay heavy tax on it.ALL REAL ESTATE REGISTRATIONS SHOULD BE LINKED TO ADHAAR CARD/PAN CARD TO BRING OUT UNDECLARED ASSETS.



Manish Shah

Feb 11, 2015

dear Vivekji,

another reason for the real estate prices being so high in urban areas is exemption from capital gains tax if a capital gain from sale of a property is invested in to another property within a specified period from the year of realisation of capital gains. Being closely associated with real estate brokers and a buyer who has been looking for an affordable reasonably priced housing, i have seen instances of such buyers paying fancy prices (way of its worth considering the location and civic problems) just to escape the capital gain taxes. May be finance minister can consider plugging this loophole too and limit the exemption only to investment in Capital Gains Bonds which whould be available through out the year. Of course the black money being invested is a main reason. Isn't it curious that Builders do not reduce the prices for months and years together even though they hold the inventories which defy the logical business sense.Its possible only when you have capital which has no cost or very little cost. A probe in to how they get such staying power would surely bring out can of worms. I would guess that the amount involved in this would even surpass the amount of black money stashed abroad.



Feb 11, 2015

It is very EASY & simple to stabilise real estate prices & you will shocked to know the answer.
Simply bring flat 5% to 10% wealth tax for more than one house(whether rented or not & no limit of 30lacs applicable).Charge Estate duty of 5% to 10% on inheritance.
Really such a rare but invetiable thing(like food) cannot be kept for speculation.....In short there should not be HOARDING OF REAL ESTATE...
There will be earthquake in real state market vis-a-vis, Govt will collect huge wealth tax.....but for this Govt should have DESIRE


Surendra Singh

Feb 10, 2015

The tax benefit on housing loan interest should be strictly restricted to self occupied house only.This will help in easing of valuation of housing proerty.You may please give suggestion to the Finance Minister for considering in the budget.

Surendra Singh



Feb 10, 2015

Dear Vivek
I read your article on real estate.
I am Chartered Accountant.

Real estate price will not come down until menace of black money is controlled effectively.Easiest way to do this

1) By certain date (say by 31 March 2017), Government should make it compulsory that all real estate in major cities and towns need to have PAN linked to it. By 2020, entire India should be covered.
This will help Govt to determine who is holding largest inventories.
2) If Builder has developed a plot, all flats in the building which are unsold should carry PAN of the builder
3) If a real estate is not tagged to a PAN, municipal tax to be doubled and wealth tax (if discovered) rate to be doubled
4) If a builder does not sell the property within 3 years of getting of NOC to start construction, wealth tax at double rate to be levied on such properties.
I am sure many such small steps will force builder to liquidate his holding as well as avoid using black money.


Satish Shah

Feb 10, 2015

Dear Vivek,
I would like to correct you and your one of the reader in context of buying 2/3 flats in far off suburbs of Mumbai. The prime moto of any person to buy a property is not speculation and not in much sense of tax savings. Yes in a way a person goes for extra flat as SIP (Systematic Investment Plan)alike Shares Portfolio, Gold & Silver Investments, Debentures, M.F. & Bonds etc. For younger couple it is like paying back period of 20/25 years and by the time they reach to 55 years then handy savings for their children's marriage or further studies. I have seen this mentalities with NRIs of Europe, Australia & US + Canada.
The finest part of this investment is these second/ third houses are blessings in disguise for a small time migrant to big cities. In old days the landloards owned big chawls and used to rent it out but with increase in property rates and hindrance created due to Bombay Rent Control Act those things are bygones and now these petty landloards are filling that void.
Satish Shah



Feb 10, 2015

Make it mandatory for all states to display data of all properties beung registered in sub registrar offices online and real time in a very customer friendly UI (preferably on Google map) so much needed transparency in pricing would come and would be major help in plugging black money economy..We can even execute same for govt & it would be revenue generating too..



Feb 10, 2015


Housing for all is not a bad vision-Letting people invest in Houses is not a bad thought.I think the way to go about it is to clearly identify a quantum and then say you may hold 10 houses but the maximum tax break on capital paid/interest paid cannot be more than the amount specified.
I think the larger/bigger picture question is whether the RBI/Govt should encourage/discourage real estate bubble and if not what should they do? Bank finance for real estate must be strictly restructuring of loans for real estate developers/strict action under SRAFESI to ensure disposal of assets seized...and more importantly ensure that all transactions related to real estate must be throught banking system only.Though most of the house purchase is now through is still through cash...and that is where the political/developer nexus starts...

Encouraging house purchase for self occupation/investment by individuals is a another of mode of savings encouragement.


vijay kumar

Feb 10, 2015

all the property records with sub registrar office and muncipal records to connect to aadhar records.

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