Detailed Analysis of Affordable Housing Deduction under Income Tax

Section 80-IBA Detailed Analysis – Affordable Housing Project

1.  Affordable Housing Meaning

Affordable housing refers to housing units that are affordable by that section of society whose income is below the median household income. The basic intention of the Government is to build houses which are affordable to below medium class. The incentives given by the Government by way of Income Tax exemption, reduced GST Rate etc should ultimately result into affordable houses to the section of society whose income is below the median.

2. Deduction available under Section 80-IBA of the Income Tax Act 1961

Deduction of an amount equal to hundred per cent (100%) of the profits and gains derived from Affordable Housing Project developed & sold as per the conditions specified in the Section. Thus the enire profit from the Housing Project which qualifies as Affordable as per Section 80 IBA is exempt from Income Tax. Where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects, there shall, subject to the provisions of this section, be allowed, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business.

3. Deduction available to an Assessee

As per Section 2(7)  “assessee” means a person by whom any tax or any other sum of money is payable under this Act, and includes—

(a)  every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person ;

(b)  every person who is deemed to be an assessee under any provision of this Act ;

(c)  every person who is deemed to be an assessee in default under any provision of this Act ;

4. Assessee means a Person

As per Section 2(31) “person” includes—

(i)  an individual,

(ii)  a Hindu undivided family,

(iii)  a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;

5. Gross Total Income includes Profits and gains derived from the business of developing and building housing projects

The basic condition is that the Gross Total Income of the Assessee must include Profit from the Business of Developing Housing Project. Housing Project in regular terms means a project for development & sale of Constructed Units for the purpose of dwelling as per the local governing laws.

6. Affordable Housing Project means

“Housing Project” means a project consisting predominantly of residential units with such other facilities and amenities as the competent authority may approve subject to the provisions of this section.

7. Approval of Project

The project is approved by the competent authority after the 1st day of June, 2016, but on or before the 31st day of March, 2020. Commencement Certificate issued by Competent Authority must be prior to 01-April-2020.

8. By Competent Authority

“Competent Authority” means the authority empowered to approve the building plan by or under any law for the time being in force such as Corporations, Regional Development Authorities etc.

9. Project Completion Period

The project must be completed within a period of Five Years from the date of approval by the competent authority. In short Completion Certificate must be obtained within 5 years from the Date of Commencement as per Commencement Certificate. Application for Completion will not suffice the purpose & proper signed Completion Certificate should be obtained within 5 years from Competent Authority as defined above. Architect’s Completion Certificate will not suffice.

10. Multiple or Revised Approvals for the Housing Project

Where the approval in respect of a housing project is obtained more than once, the project shall be deemed to have been approved on the date on which the building plan of such housing project was first approved by the competent authority. In short for multiple or revised approvals for the same project, the first certified approval date will be considered as Date of Commencement.

11. Completion within 5 years must be in totality

The project shall be deemed to have been completed when a certificate of completion of project as a whole is obtained in writing from the competent authority. It means that the completion for all the units & all the buildings comprised in the housing project must be obtained within 5 years from the date of first commencement certificate.

12. Maximum Permissible Shops or Offices Area

The RERA Carpet Area of the Shops and other commercial establishments included in the housing project does not exceed three per cent of the aggregate carpet area. It means the total carpet area of all shops in the project shall not excced 3 % of total carpet area of all the units ( shops & flats ) comprised in the said project.

13. Carpet Area as defined

“Carpet Area” shall have the same meaning as assigned to it in clause (k) of section 2 of the Real Estate (Regulation and Development) Act, 2016

14. RERA Carpet Area

“Carpet Area” means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.

15. Balcony Meaning

Explanation.— For the purpose of this clause, the expression “exclusive balcony or verandah area” means the area of the balcony or verandah, as the case may be, which is appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee; and “exclusive open terrace area” means the area of open terrace which is appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee;

16. Net Usable Floor Area excludes

It excludes external walls, exclusive balcony or verandah and open terrace area. It is mentioned that balcony or verandah. It also mentioned open terrace area. It could be interpreted that balcony & open terrace internal area will be excluded.

17. Net Usable Floor Area includes

It includes internal partition walls of the apartment.

18. Verandah or balcony meaning

a roofed platform along the outside of a unit.

19. Area of Plot of Land & its Location

The project is on a plot of land measuring not less than—

(i) one thousand square metres, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai 12; or

(ii) two thousand square metres, where the project is located in any other place;

20. For project within Chennai, Delhi, Kolkata or Mumbai

If plot on which project to be constructed is situated within corporation limits of Chennai, Delhi, Kolkata or Mumbai then the  Plot Size must be minium 1000 sq mtr ie 10763.9 sq ft

21. For project at any place other than Chennai, Delhi, Kolkata or Mumbai

If plot on which project to be constructed is situated at any place outside the corporation limits of Chennai, Delhi, Kolkata or Mumbai then the  Plot Size must be minium 2000 sq mtr ie 21527.82 sq ft

22. Plot means

Plot means the total area of the land on which the affordable housing project will be constructed & developed. The said plot description must be apparent from the Commencement Certificate. The measurement of the area of such plot of land must be certified as per the governing laws. The certified sanctioned plan must substantiate the fulfillment of the condition of the area of the plot of the land.

23. Only Affordable Housing Project on the said Plot

The project is the only housing project on the plot of land. There should be only Affordable Housing Project on the Plot of Land mentioned in Commencement Certificate & Sanction Plan. In short there should not be any other project on the said plot of land.

24. Carpet Area of the Residential Units in the Project for project within Chennai, Delhi, Kolkata or Mumbai

The carpet area as per RERA of the residential unit comprised in the housing project does not exceed 30 sq mtr ie 322.917 sq ft  where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai. It means each & every residential unit’s RERA Carpet Area should not exceed 322.917 sq. ft. if project is situated within corporation limits of Chennai, Delhi, Kolkata or Mumbai.

25. Carpet Area of the Residential Units in the Project for project at any other place outside Chennai, Delhi, Kolkata or Mumbai

The carpet area as per RERA of the residential unit comprised in the housing project does not exceed 60 sq mtr ie 645.835 sq ft  where the project is located at any other place outside the cities of Chennai, Delhi, Kolkata or Mumbai. It means each & every residential unit’s RERA Carpet Area should not exceed 645.835 sq. ft. if project is situated outside corporation limits of Chennai, Delhi, Kolkata or Mumbai at any other place in India.

26. Residential Unit means

“Residential Unit” means an independent housing unit with separate facilities for living, cooking and sanitary requirements, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household. Thus Residential Unit shall comprise of at least living room, kitchen & sanitary ie WC, Bath & Basin with an independent entrance door to the unit.

27. Only one unit to an individual and his/her spouse

Where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual. It means only one residential unit can be alloted to an individual & his family comprising spouse & minor child. But there is no restriction to allot additional residential unit to the father or major son of such individual.

28. 90% Floor Area Ratio for  project within Chennai, Delhi, Kolkata or Mumbai

The said project utilises not less than ninety per cent of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai.

29. 80% Floor Area Ratio for  project at any other place outside Chennai, Delhi, Kolkata or Mumbai

The said project utilises not less than eighty per cent of such floor area ratio where such project is located in any place outside the corporation limits of  Chennai, Delhi, Kolkata or Mumbai.

30. Floor Area Ratio meaning

“Floor Area Ratio” means the quotient obtained by dividing the total covered area of plinth area on all the floors by the area of the plot of land.

31. Plinth Area meaning

Plinth area is the covered built-up area measured at the floor level of any storey or at the floor level of the basement. Plinth area is also called as built-up area and is the entire area occupied by the building including internal and external walls.

32. Floor Area Ratio Calculation

Total plinth area of all the floors in the Housing Project / Total area of the plot of land on which Housing Project is developed

33. Floor Area Ratio Test to Qualify

In short the actual construction carried out towards construction of units ( Built Up Area ) should exceed at least 80% of the total area of the land on which Project is developed.

34. Separate Books of Accounts

The assessee maintains separate books of account in respect of the housing project. It is important to maintain proper Books of Accounts & Records of the Affordable Housing Project separately from other Projects of the same assessee if any.

35. Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT) Applicability

MAT will be applicable on Corporate Assessee and AMT will be applicable for Non Corporate Assessee at 18.5% basic and applicable surchage & cess towards Profit from  the Affordable Housing Project. The said MAT or AMT can be adjusted against the subsequent years tax liability & will be carried forward up to 15 years.

36. Utilisation of MAT or AMT Credit

The Assessee needs to deposit MAT or AMT on profit from Affordable Housing Project. The said MAT or AMT deposited will be carried forward till next 15 years for utilisation towards Income Tax liability on the same Assessee in future. If there is no Income Tax liability till next 15 years of the same Assessee, then MAT or AMT credit will lapse. The said MAT or AMT credit could be adjusted against Income Tax on Profits from Non Affordable Housing Projects or Commercial Projects of the same Assessee.

37. Total Rate of MAT or AMT

The rate of Surcharge vary based on category of person & total income. Considering Basic Rate of 18.5% and applicable Surcharge & Cess, the total rate of MAT or AMT will fall around 21%.

38. Blockage of Funds to the  extent of MAT or AMT

The Assessee needs to deposit MAT or AMT on profit from Affordable Housing Project.  To that extent the funds gets blocked in taxation till the said MAT or AMT is utilised towards other Income Tax liability of the same assessee.

39. ICDS Applicability

ICDS III – Construction Contracts is manadatory. It is necessary to adopt Percentage of Completion Method for booking Turnover as per ICDS III by the developers of the housing project. Accordingly when reasonable certainity about collection is ascertained based on bookings status, construction stage etc. it is necessary to book turnover adopting Percentage of Completion Method each year till completion of the project. After Project Completion, the turnover will be booked on actual sale of ready inventory of unsold units.

40. Completion within 5 years & not necessarily sale

It is mandatory to obtain completion within 5 years from the commencement date. But sale of units could happen even after completion and still deduction umder the section will be available.

Disclaimer : Even though due care has been taken to ensure the completeness and reliability of the information provided, users of this information are expected to refer to the relevant existing provisions of applicable laws. The user of the information agrees that the information is not a professional  advice & we assume no responsibility for the consequences of use of such information.