Personal Finance

Go for completed houses

Meera Siva | Updated on March 03, 2019 Published on March 03, 2019

Even with the GST rate cut, under-construction houses are still not attractive

The GST rates for under-construction housing properties were reduced last week — from 12 per cent to 5 per cent. For houses that meet the criteria of affordable houses (costing less than ₹45 lakh and measuring up to 645 sq ft in metro and 968 sq ft in non-metro cities), the rate has been lowered to 1 per cent, from 8 per cent. These rates come into effect on April 1, 2019.

Does this 7 per cent reduction in GST rates make under-construction properties more attractive for home buyers? The answer is a no, for at least three reasons.

Risky bet

The main reason to opt for completed houses is minimising risks. Buying a flat that is still being constructed brings a lot of uncertainties. For one, what you get may not be what you see in the glossy brochures or the decked-up model flat. The quality of construction and finish may also not be what you expect.

Worse, you may not get the house within the time promised to you. There are often delays in approvals and construction process. So — as has been the harrowing experience of many buyers in the past — delivery is delayed. While things are expected to improve with the Real Estate (Regulation and Development) Act (RERA), it is not fool-proof as construction is a complicated process and various factors including lack of raw material such as sand and labour, or lack of funds may hold up a project. There are also liquidity risks. For example, if you want to sell the house for some reason, it may not be easy to find a buyer until it is completed and there may be charges (₹300-400 per sq ft) to transfer the agreement to a new buyer.

Choices galore

Even if you are confident that these risks can be managed, you should know that there is no lack of choice in ready-to-move-in houses. Data on unsold inventory from ANAROCK Property Consultants showed that there are 6.73 lakh units available in the top seven cities. Of these,nearly 85,000 units are ready-to-move-in. With construction on-going and sales slow, the share of ready-to-move-in properties is only likely to increase.

Also, there is also a good supply of ready houses in the secondary market. Many investors who had booked houses in the early stages — hoping to make quick gains — are looking to exit. And those who bought it as an investment — for rent and/or capital appreciation — are also on the look-out to sell, as returns are expected to be lacklustre.

Developers also have reasons to unload their inventory of ready-to-move-in houses, as these may add to their tax burden. Currently, there is an exemption from tax on completed but unsold inventory, charged based on notional rent. However, this is only for two years; after this period, developers face a tax burden. So, it may be beneficial for a developer who may have under-construction and completed houses to sell the completed ones.

Money matters

Buying an under-construction property may not make much financial sense, either. For one, completed properties do not fall under GST and you may want to do the maths on the cost economics before choosing.

For instance, data from ANAROCK showed that the average price per sqft for ready-to-move-in houses in Bengaluru was ₹5,200. This is only marginally (6 per cent) higher than the cost of under-construction properties (₹4,900). Similar price differentials were noted for Chennai and Hyderabad as well. There may be no significant financial advantage to taking on delivery risk.

The price difference is also only likely to narrow. For one, there is the developer’s interest to sell completed houses due to the deemed-tax issue. Also, the rate cut for GST came with the elimination of input tax credit benefits for developers. As a result, they may have to increase the price for under-construction houses to cover this loss.

A home buyer’s tax benefits may also be better with a completed house. For example, tax benefits for interest paid on a home loan can only be claimed after possession happens. So, the tax benefit is deferred. After completion, you can claim deduction on the pre-completion interest paid, over five years. But if the house is not handed over in five years, the maximum deduction is capped at ₹30,000, instead of ₹2 lakh per annum.

Special cases

There may be situations where opting for under-construction properties may be needed or better. For example, in new neighbourhoods, there may not be completed houses available that meet your requirements. Also, there may be cases where the new houses are priced very attractively compared with completed house, and the developer risk is low.

The writer is an independent financial advisor

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