Giving a thrust to affordable homes, the govt has proposed full tax rebate on developing such projects under a notified scheme and raised the ceiling of one percent interest subsidy on home loans upto Rs 15 lakh from the current Rs 10 lakh.

In the Budget for 2011-12, Finance Minister Pranab Mukherjee proposed 100 percent tax deductions on capital expenditure to develop affordable houses under government scheme, thus promoting builders to focus more on such homes.

“Considering the importance of housing, I propose investment linked deduction to businesses, which develop affordable housing under a notified scheme,” he said.

Currently under the section 35AD of the Income Tax Act, a housing project for slum re-development and rehabilitation is incentivised with 100 percent tax exemption.

The incentives are extended to “developing and building a housing project under a scheme for affordable housing framed by the central government or a state government, as the case may be, and notified by the board in this behalf in accordance with the guidelines as may be prescribed”. This was stated in the budgetary document.

Mukherjee also raised the limit for one per cent interest subsidy on home loans to up to Rs 15 lakh from the current level of Rs 10 lakh, a move that could encourage buyers of low cost houses.

He also increased the value of houses eligible for availing such subsidy by Rs 5 lakh to Rs 25 lakh.

“To further stimulate growth in housing sector, I am liberalising the existing scheme of interest subvention of one per cent on housing loans by extending it to housing loan up to Rs 15 lakh, where the cost of the house does not exceed Rs 25 lakh from the present limit of Rs 10 lakh and Rs 20 lakh respectively,” he said.

The government also enhanced the existing housing loan limit to Rs 25 lakh from Rs 20 lakh under priority sector lending on account of increase in prices of residential properties in urban areas, he added.

On the development of homes for poor, Mukherjee said: “Credit enablement of economically weaker sections (EWS) and LIG (low income group) households is a serious challenge. To address this issue, I propose to create a Mortgage Risk Guarantee Fund under Rajiv Awas Yojana.

“This would guarantee housing loans taken by EWS and LIG households and enhance their credit worthiness”.

Mukherjee also announced enhancing the provision under Rural Housing Fund to Rs 3,000 crore from the existing Rs 2,000 crore to provide housing finance in rural areas at competitive rates.

Welcoming the moves, analyst and real estate developers said these proposals are likely to encourage builders to give more emphasis to projects costing up to Rs 25 lakh.

The country’s largest realty consultant Jones Lang LaSalle India Chairman and Country Head Anuj Puri said firms such as Unitech and Ansals, which are rolling out budget housing, will be benefited by increase of volumes.

“The one per cent interest subvention for home loans up to Rs 15 lakh from the previous limit of Rs 10 lakh will come as a relief to home loan borrowers from the LIG segment,” he said, adding raising the priority home loan limit is also a good news for the LIG segment.

Another consultant Cushman & Wakefield said the proposal will help developing affordable houses in smaller cities.

“The announcement…will enable to create a demand for housing in smaller cities, where housing is available for a ticket size of less than Rs 25 lakhs. This is expected to increase the development momentum in such locations,” Cushman & Wakefield India Managing Director Anurag Mathur said.

Reacting to the proposals, Parsvnath Developers Chairman Pradeep Jain said these will encourage builders to focus more on constructing such projects.

“This is an excellent move. It will really boost developers’ morale to go more for such projects,” he added.

Unitech Managing Director Sanjay Chandra said measures such as expanding the coverage of interest subvention scheme and providing 100 percent deduction in respect of capital expenditure incurred on development of affordable housing, “will certainly aid in boosting the demand and development of affordable housing in the coming months”.

Industry players, however, expressed unhappiness over the government’s decision not to re-introduce the tax exemption scheme to develop affordable houses under the section 80IB(10) of Income Tax Act.

In the 2010-11 Budget, the government had announced a one-time interim relief to the housing and real estate sector by allowing builders to complete affordable housing projects in five years instead of four years to claim deductions on profit under section 80IB(10) of Income Tax Act.

However, this extension is available for housing projects approved on or after 1st April 2005.

Under the existing provision of section 80IB(10), 100 percent deduction is allowed to developers to build affordable housing projects provided the project is sanctioned before 31st March 2008.

Housing and Urban Poverty Alleviation Minister Kumari Selja hailed Mukherjee’s announcement of sops for affordable housing to the less privileged under the Rajiv Awas Yojana.

“The budget had provided for liberalisation in 1 per cent interest subvention for housing, by way of increase in the size of loans covered from Rs 10 lakh to Rs 15 lakh. It had also increased the priority of housing construction in the development agenda, by raising the cap on housing loans qualifying for priority sector lending to Rs 25 lakhs from the current Rs 20 lakhs,” Selja said.

She maintained that housing construction has a large multiplier effect on growth, by the spin off benefit for about 20 other related industries, and an eight-fold increase in employment.

Selja said the budget had put the right fiscal policy environment in place for the growth of housing.

“There is a housing deficit of about 2.5 crore for the EWS and LIG, growing at the rate of about 3.6 lakhs per annum. The shortage of affordable housing is reaching critical proportions,” she said.

The Minister insisted that the budget had provided incentive to private developers to build affordable housing.

“The investment linked tax deductions to businesses that construct affordable housing should go a long way to motivate private developers to invest in small housing,” she said.

Selja said the demand of private developers for affordable housing would now be met because of the permission to HUDCO to issue tax free bonds of Rs 5000 crore for housing and infrastructure.

“The Mortgage Risk Guarantee Fund would make a positive impact for financial inclusion of the poor for housing. Under Rajiv Awas Yojana, there was need to create affordable housing stock in order to prevent new slums from being formed,” she said.