Tax Holiday, Debt Financing Of REITs; Key Highlights Of Real Estate Sector In Budget 2021

Sec 194 of the Income Tax Act, governs the provisions for deduction of TDS on payment of dividend. The Finance Bill add REITs and InVITS as entities to whom if a dividend is being paid, no TDS will be deducted (such a provision was currently in place for insurance companies). In any case the Union Budget 2021 had specifically exempted dividends from REITs / InVITS as exempt from tax, so long as the maintained the older tax rate regime.  The current amendment, aligns with the same wherein asset SPVs do not have to deduct TDS on payment of dividends to the trust.

·         Debt Financing of InVITs and REITs by Foreign Portfolio Investors will be enabled by making suitable amendments in the relevant legislations. This will further ease access of finance to InVITS and REITs thus augmenting funds for infrastructure and real estate sectors. We note that the trust (holding company and not asset SPVs) currently had a limitations on sourcing debt capital from domestic mutual funds and insurance companies alone. Banks are not allowed to lend money to trust (which is still a pending request from the real estate fraternity). Allowing foreign investors to invest in debt of REITs increases the sources of capital, and possibly could help further lower cost of debt for the REIT. This will help facilitate REITs such as Embassy and Mindspace to increase their leverage profile.

Budget 2021 also extends the benefit of Sec80 EEA (additional Rs150K interest deduction) for affordable housing, as well as Sec 80 IAC (tax exemption available to a developer for affordable housing) for another year (upto 31st March 2022). While most listed developers have limited inventory that qualifies for the affordable classification (<Rs4.5 mn). However companies like Sobha, Brigade and Sunteck do have some projects that could benefit from the extension.

·         Sec 43 CA provided a safe harbour limit, wherein the transaction value of real estate could be 10% lower than the assessable value. In order to encourage developers to liquidate inventory at lower prices, the current budget has increased the safe harbour limit to 20% from 10%.