Finance
Housing Components & Financing Requirements​
In the creation of any new housing stock, there are multiple stages, with financing requirements to be fulfilled for each stage, made possible by the involvement of varied stakeholders.
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Project Funding Stages & Corresponding Interest Levels
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The above image shows the different phases involved in financing any housing project. However, in rental housing, financing would not only include land and construction, but also extend beyond project completion into management, a crucial aspect. It is important to recognise the need for appropriate funding for each of these components to facilitate the creation of new rental housing stock. However, currently, no financial mechanisms have been made available to ensure this, thereby gravely affecting the creation of adequate rental housing across all income brackets.
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The main factors plaguing each of the components of rental housing are as follows:
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No Financial mechanisms for creation of rental housing across all income brackets​
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Key Issues affecting the Components of Rental Housing
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Existing Finance Mechanisms
Housing finance institutions (HFI), in the Indian context, provide crucial financial support for the development of rental housing. Housing is facilitated by both government-led institutions like the National Housing Bank (NHB) and the Housing and Urban Development Corporation (HUDCO) alongside private institutions and mechanisms as well as Housing and Development Finance Corporation (HDFC) and Real Estate Investment Trusts (REIT) for residential projects in the near future. The support offered by them towards the development of housing can be categorised as follows:
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Comparison of Housing Finance Providers​
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Real Estate Investment Trusts (REITs)​
A Real Estate Investment Trust (REIT) is a corporation that owns and manages income-producing real estate. It allows money from multiple investors to be pooled into a single trust registered with the Securities and Exchange Board of India (SEBI) which is also responsible for the regulation of REITs. They are professionally managed and the pooled money is invested into income-producing assets (75% completed, income-producing assets + 25% assets under construction, cash, stocks, or bonds).
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REITs in India are still in their nascent phase, having only been operationalised in 2019, with only 4 listed REITs and a total market capitalisation of Rs. 85,785 Cr (~$9.5 billion; 0.3% of the total stock market) as of 2024. The listed REITs are mostly office-backed, though some retail-backed REITs are now entering the market. REITs in India have not begun to engage with the residential market.​
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Comparison of REITs in India with Global REIT Markets
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​In comparison, the REIT market in the US is highly developed with a market capitalisation of $1,554 billion, of which residential REITs account for $214.5 billion (14% of the total residential market). Of the residential REITs, there are 20 public listed, 2 public non-listed and 5 private residential REITs; 9 of these are involved in the creation and supply of affordable housing.
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Residential REITs in the US
REITs present a relatively unexplored avenue for creating and managing new rental housing supply in India. Their immense success in global markets indicates their untapped potential, both as a provider of housing and as a financial mechanism.
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Tax Benefits​
For Landlords
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Rental income is taxable under the category “Income from House Property”. The following deductions apply:
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Standard deduction of 30%: Deduction of 30% is allowed on net annual value of property which covers expenses like repairs, maintenance on the property;
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Home loan interest deduction (Section 24(b)): If the rented property was bought on a home loan; one can claim deduction on interest paid for the property (with no upper limit as opposed to the 2 lakh interest deduction limit on self-occupied properties);
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Municipal taxes: Property tax and municipal tax is deductible from rental income if the tenant is not paying for the same;
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Pre-Construction interest: 1/5th of the interest paid during the pre-construction period of the property can be claimed; and
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Vacancy loss: Deduction on the rent lost due to property being vacant.
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For Tenants
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For a salaried employee receiving House Rent Allowance (HRA), the tax exemption on HRA under Section 10 (13a) is the least of
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Actual HRA received;
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Rent paid in excess of 10% of salary (rent paid minus 10% of salary); or
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50% of basic salary
For a non-salaried individual who does not receive HRA, deductions under Section 80GG are limited to the least of:
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Rs. 5,000 per month (Rs 60,000 per annum);
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25% of total income; or
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Actual rent paid in excess of 10% of total income
If 30% of annual income is put forth towards housing, the following scenarios emerge while comparing home ownership and renting:
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Renting (HRA) vs Home Ownership (EMI)
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For annual income groups below the tax bracket of Rs. 3 lakhs (MIG) – 12 lakhs, home ownership through EMI is beneficial due to the tax concessions on buying property.
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Renting in Informal Housing​
Informal renting is an important apparatus through which the urban poor access affordable housing. While basic services may often be lacking in such housing, severely impacting their liveability, it is also important to acknowledge that informality provides lower rental rates as well as flexibility for both tenants and landlords, thus making it impossible to ignore the role of informal housing in the housing landscape of Mumbai. A comparison of formal and informal rental rates across the MMR area is presented below.​
Renting Formal vs Informal Housing in Mumbai
We are currently engaging with the Society for the Promotion of Area Resource Centers (SPARC) to better understand the informal rental housing market in Mumbai.
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