#UnionBudget: Did Govt Actually Make Renting More Feasible?

#UnionBudget: Did Govt Actually Make Renting More Feasible?

#UnionBudget: Did Govt Actually Make Renting More Feasible?

In the Union Budget 2016-17, the government announced that the tax deduction limit for people who live in rented houses would be raised from Rs 24,000 to Rs 60,000 an annum. This will be applicable to people not receiving housing rent allowance (HRA) from their employers. Moreover, they should also comply with the norms in Section 80 GG of the Income Tax (I-T) Act, 1961.

Many argue that if the government had allowed salaried and self-employed people from benefitting from the scheme, the circle of beneficiaries could have been widened.

A common argument is that the present tax structure in India discourages renting. This is true of the rest of the world, too. While home owners benefit from tax deductions, mortgage loans and many such benefits, tenants do not enjoy any such perks. Moreover, people have a strong incentive to buy than to rent because a house is an asset. The nominal value of real estate assets tend to rise, even when their real value does not.

However, there is no good reason why taxation should discriminate against people who rent out houses. The fact is that home owners would not have much of an incentive to buy or build houses, if they can't rent it out easily at a lower cost to themselves.

Why must the government encourage renting?

When people who live in rented houses are eligible for tax deductions, there will be greater demand for houses in the market. When this demand goes up, the cost of renting a house will rise but this will raise the rental yield in the country. (Rental yield in India is incomparably lower than the rental yield in countries like the US. In fact, this is one of the greatest barriers to real estate investment in India, even though appreciation in nominal values is high.) If the rental yield rises, there will be greater investment in housing. This will raise the supply of housing, making it more affordable.

Moreover, when rental yield is high, home owners are more likely to build or buy even when they themselves would not be able to occupy it. Now, as the rental yield is low, and because of various norms that are stacked against landlords, there is less financial incentive to build. Are you likely to build or buy when you have no intention to occupy your house soon, if it cannot be rented out easily? If you are an investor, are you likely to build or buy when you think that you cannot easily rent out your house before trading it in the market?

Even for tenants, such norms would be beneficial because there will be a large supply of houses in the rental market. When there are more houses in the rental market, monthly rents will fall, too.

Last Updated: Fri Mar 04 2016

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