The budget for 2017-18 presented by the Finance Minister, has made an interesting provision with respect to properties that are not self-occupied. Until now, if one purchased a second property (i.e. other than the one that was self-occupied), one could charge all the interest on the loan taken for that property against the rental income and this expense could also be set off against other heads of income like salary, business, etc. As per the provisions of this budget, the amount of interest that can be charged off against your income in the above example has been limited to Rs 200,000 per year which is at par with what it is for a self-occupied property.
At the same time, the government has given self-occupied affordable housing a big push by giving a 3 and 4% interest subsidy for all loans of individuals who are below a certain income threshold. This is given as a direct cash transfer from the government into the borrower’s account. This is however applicable only for property that is 30 sq m of carpet area in metro cities and 60 sq m in non-metros. Moreover, affordable housing has been granted infrastructure status and there are significant tax benefits for developers of these properties. The idea seems to be to encourage home ownership especially for the middle class households, but discourage investment and speculation in higher priced properties for the purpose of earning rent and property appreciation.
The property market in India has been going through a dull phase, with very limited price appreciation over the last 2-3 years – a big come down from the heady years, when double digit price appreciation was the norm. This move by the government to limit the tax benefit for the second property, could place a further dampener on property prices and discourage speculative investment in the property sector. Moreover, the real estate sector continues to face the drag of high inventory of unsold properties.
At the same time, we have seen a big reduction in the interest rates being offered by banks for fixed deposits. The dice was anyway loaded against fixed deposits since the post-tax return on FDs barely keeps up with inflation. The reduction in interest rates tilts the balance further away from putting money into FDs.
One of the big beneficiaries of the reducing interest rates have been debt fund holders, particularly those who are invested in debt funds that have a longer duration of assets i.e. longer tenure debt securities. The greater the rate cut and longer the tenure, higher is the positive impact of an interest rate cut. Interestingly, equity is an asset class which has the longest duration because there is no redemption – it is permanent in a sense. Hence equities can be expected to be the biggest beneficiaries of an interest rate cut. With alternative asset classes like debt and property on a weaker wicket, it is likely that equity products will attract larger inflows and this has also been the case with domestic mutual funds seeing an inflow of roughly $10bn per annum over the last 2 years. Having said this, investors would do well to look at the individual valuations of the stocks that they own as it is a very stock specific market.