»Vivek Kaul's Diary

Here's More Data to Show How Over-Priced Indian Real Estate Is
6 MAY 2016

I know I am kind of going overboard with the analysis of the data released by the Income Tax department last week, but believe me it is necessary, to show how loaded things are against people who actually pay income tax.

Last week, the Income Tax department released some very interesting data-the kind of stuff that it had not released for a while.

It released detailed numbers for income tax returns filed in assessment year 2012-2013. In the assessment year 2012-2013, the income tax returns for the income earned in 2011-2012 was filed.

Let's look at the income tax returns of individuals in detail. The Income Tax department has provided data for income for individuals under the head-salary, business income, other income, short-term capital gains, long-term capital gains and interest income.

Take a look at the following table:

This table tells us that the average income of individuals filing an income tax return is around Rs 4.40 lakh.

#### Table 1: Income under the head (in Rs crore)

 Salary 6,27,200 House property income 29,927 Business income 4,03,251 long term capital gain 30,479 short term capital gains 3,290 Other sources income 1,28,020 Interest income 44,918 Total (in Rs crore) 12,67,085 Total number of returns 287,66,266 Average income Rs 4,40,476

How do things look if we look at just the salaried class?

#### Table 2

 Salary (in Rs crore) 6,27,200 Number of returns filed 116,76,493 Average income Rs 5,37,148

As can be seen from the above table the average income of the salaried class in India filing income tax returns is Rs 5.37 lakh. This is around 22% more than the average income of the individuals filing income tax return.

It is important to understand here that most individuals belonging to the salaried class would have an income lower than the average income of Rs 5.37 lakh. In order to understand this, we will have to take a look at the data in a little more detail.

Let's divide the data in those earnings up to Rs 10 lakh and those earning more than Rs 10 lakh. Let's consider those earning up to Rs 10 lakh first (See Table 3). As can be seen from Table 2, the total number of returns filed by the salaried class comes to around 1.17 crore.

Of this close to 1.06 crore have salaried incomes of up to Rs 10 lakh. This means around 91% of the salaried class filing income tax returns have an income of up to Rs 10 lakh. Take a look at the following table (Table 3).

#### Table 3

Salary range Number of returns Sum of Salary Income (in Rs crore)
>0 and <=1,50,000 16,00,167 14,956
>150,000 and <= 2,00,000 10,67,300 18,853
>2,00,000 and <=2,50,000 10,24,315 23,120
>2,50,000 and <= 3,50,000 19,18,714 57,075
>3,50,000 and <= 4,00,000 8,06,685 30,215
>4,00,000 and <= 4,50,000 7,54,202 32,048
>4,50,000 and <= 5,00,000 6,96,210 33,032
>5,00,000 and <= 5,50,000 5,95,298 31,190
>5,50,000 and <= 9,50,000 20,23,583 1,40,464
>9,50,000 and <= 10,00,000 1,00,155 9,760
Total 105,86,629 3,90,713
Average Income Rs 3,69,063

The average income of those earning up to Rs 10 lakh is Rs 3.69 lakh. This is significantly lower than the overall average income of Rs 5.37 lakh of the salaried class filing income tax returns. How do things look for those earning an income of up to Rs 5 lakh?

#### Table 4

Salary range Number of returns Sum of Salary Income (in Rs crore)
>0 and <=1,50,000 16,00,167 14,956
>150,000 and <= 2,00,000 10,67,300 18,853
>2,00,000 and <=2,50,000 10,24,315 23,120
>2,50,000 and <= 3,50,000 19,18,714 57,075
>3,50,000 and <= 4,00,000 8,06,685 30,215
>4,00,000 and <= 4,50,000 7,54,202 32,048
>4,50,000 and <= 5,00,000 6,96,210 33,032
Total 78,67,593 2,09,299
Average income Rs 2,66,027

The average income of those earning less than Rs 5 lakh is around Rs 2.66 lakh. These individuals form around two-thirds of the overall salaried class filing income tax returns.

How do things look for those earning more than Rs 10 lakh per year?

#### Table 5

Salary range Number of returns Sum of Salary Income (in Rs crore)
>10,00,000 and <=15,00,000 5,92,418 71,464
>15,00,000 and <= 20,00,000 2,07,141 35,566
>20,00,000 and <= 25,00,000 1,10,700 24,708
>25,00,000 and <= 50,00,000 1,24,472 41,302
>50,00,000 and <= 1,00,00,000 36,775 25,032
>1,00,00,000 and <=5,00,00,000 17,515 30,661
>5,00,00,000 and <=10,00,00,000 655 4,375
>10,00,00,000 and <=25,00,00,000 156 2,158
>25,00,00,000 and <=50,00,00,000 26 809
>50,00,00,000 and <=100,00,00,000 6 412
Total 10,89,864 2,36,487
Average income 21,69,876

The average income of those earning more than Rs 10 lakh per year comes to around Rs 21.7 lakh more and is significantly more than the overall average of Rs 5.37 lakh for the salaried class.

What do these tables tell us? That the average salaried Indian who files income tax returns doesn't earn much. As mentioned earlier, around 91% of the salaried class has an average income of Rs 3.69 lakh. Close to two-thirds have an average income of Rs 2.66 lakh.

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This basically means that the income of the average salaried Indian filing an income tax return is significantly lower than the overall average salaried income as well as overall average income. At least that is how things were for the assessment year 2012-2013.

A question worth asking here is what sort of a home can individual earning a salary of Rs 3.69 lakh per year, actually afford. An annual income of Rs 3.69 lakh translates into a monthly income of around Rs 30,755.

What sort of a home loan would a bank give against this amount? Typically, a bank works with the assumption that 40% of the monthly income can go towards servicing an EMI and accordingly gives a loan.

In this case that amounts to around Rs 12,300. An EMI of Rs 12,300 at an interest rate of 10% and a tenure of 20 years, would service a home loan of Rs 12.75 lakh. Banks typically lend up to 80% of the official value of the property. This means an official value of property of around Rs 16 lakh (Rs 12.75 lakh divided by 80%). Please take into account the fact that I have used the word official because there is bound to be a black component as well.

What this number tells us is that most salaried class in 2011-2012, were not in a position to buy a home to live in, across large parts of the country. There is no reason to believe that things would have changed since then.

The point is that the demand for real estate is in the below Rs 20 lakh market price segment. But what is being built across large parts of the country is clearly above that price. As RBI governor Raghuram Rajan said in a recent speech: "I am also hopeful that prices adjust in a way that encourage people to buy."

Let's wait and see if Dr Rajan's hope becomes a reality, any time soon.

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