Real Estate Tax & Regulatory Summary

Applicable taxes:

Rental income:

Under the Indian Income-tax Act, 1961 (Act), rental income from immovable property can be characterised either as “business income” or “income from house property”.In case the income is characterised as “business income”, it would be taxable at the applicable tax rate to domestic companies. The applicable tax rate is 30%1 (plus applicable surcharge and cess) after allowing deduction of all permitted business expenses for a domestic company. The said rate will be reduced to 22% (plus applicable surcharge and cess) on a net basis in case the said company does not claim specific tax holidays, deductions and exemptions and complies with prescribed conditions.In case income is characterised as “income from house property”, such income would be taxable as per the applicable tax rate for a domestic company after allowing a standard deduction and other specified deductions (viz. property tax, interest expense) under the Act. The income computation mechanism under both the above heads of income would be different.Tax incentives are available for certain projects in the real estate sector, eg, affordable housing projects, slum redevelopment, development, building and operating hotel, operation and maintenance of specified infrastructure

Minimum alternative tax (MAT)

 Where the tax liability of an Indian company, computed in the prescribed manner, is less than 15% of the adjusted book profits of the company, MAT at 15% (plus applicable surcharge and cess) is payable by the Indian company.However, the same shall not be applicable to a company opting for concessional tax rate of 22% as stated above

Real Estate Investments

Regulatory

Direct investments in real estate property

NRI and OCI are permitted to acquire any immovable property in India other than agricultural land, plantation property, or farmhouse property. A foreign company is not permitted to directly hold any immovable property in India. However, as an exception, a foreign company (through a branch or project office or other place of business in India) is permitted to acquire any immovable property in India, for carrying on its business activities. Foreign direct investments (FDI) in real estate business are generally prohibited. Further, FDI is prohibited in an entity engaged in dealing in land and immovable property, construction of farmhouses and trading in transferable development rights. Real estate business is defined under the Non-Debt Instrument Rules as follows:“‘Real estate business” means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships. Further, following activities shall be excluded from the definition of the real estate business being:

• investment in units of REITs registered and regulated under the Securities Exchange Board of India’s (SEBI) REITs Regulations 2014;

• earning of rent income on lease of the property, not amounting to transfer, shall not amount to real estatebusiness; and

• real estate broking services and 100% foreign investment is allowed in real estate broking services under automatic route.The term, “transfer” has been defined, among other things, it also includes any arrangement having the effect of transferring or enabling enjoyment of immovable property.100% FDI in construction and development projects is permitted under the automatic route. The said investment is subject to certain investment and project-related guidelines, being as follows:

• Each phase of the construction development project would be considered as a separate project

• The foreign investor is permitted to exit and repatriate foreign investment on completion of project or trunk infrastructure or completion of a lock in period of three years, whichever is earlier. Lock in period shall be calculated with respect to each tranche of foreign investment. Lock in condition is not applicable in case of transfer of stake from one non-resident to another non-resident

• The project shall conform to the norms and standards as laid down in the applicable regulations of the State Government or Municipal or Local Body concerned. The Indian investee company shall be responsible for obtaining all necessary approvals and compliance with all other requirements

• The Indian investee company shall be permitted to sell only developed plots. The term "developed plots" is defined as plots where trunk infrastructure, ie, roads, water supply, street lighting, drainage and sewerage, have been made available

• 100% FDI under automatic route allowed in completed projects for operation and management of townships, malls/shopping complexes and business centres, subject to a lock in period of three years. Lock in period shall be calculated with respect to each tranche of foreign investment and transfer of immovable property or part thereof is not permitted during this period

• FDI is permitted under the automatic route without being subject to lock-in conditions in case of development of SEZs, hotels and tourist resorts, hospitals, educational institutions, old age homes and investment by NRIs/OCIs

FDI is also allowed up to 100% in industrial parks under the automatic route. The conditions specified above (ie, lock-in period, etc) would not apply provided the industrial park meets the prescribed conditions in terms of minimum number of units, allocable area conditions for units and industrial activity, etc.Under the FDI route, a person resident outside India is allowed to invest in equity instruments. Equity instruments has been defined to include the following:

• Equity shares, including partly paid up shares. However, such partly shares are required to be fully called-up within 12 months of such issue or as may be specified. In addition, 25% of the total consideration amount (including share premium, if any) is required to be received upfront; • fully, compulsorily and mandatorily convertible debentures;

 • Fully, compulsorily and mandatorily convertible preference shares;

• Share warrants - 25% of the consideration is required to be received upfront and the balance amount within 18 months of the issuance of such share warrants. Further, equity instruments can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price. Regarding the Non-Debt Instrument Rules, the government has provided guidelines for:

• calculation of total foreign investment – ie, direct and/or indirect foreign investment in Indian entity;

• pricing in case of issue/transfer of any capital instruments by the Indian entity to person resident outside India or any transfer of capital instrument by the person resident outside India to the Indian resident or vice versa

• downstream investments by Indian entities (ie, which has FDI) further into other Indian entities.FDI is permitted to contribute to the capital of a Limited Liability Partnership (LLP) operating in sectors/activities where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions

Real estate investment trust (REIT)

REIT is an investment vehicle that owns and operates real estate related assets and allows individual investors to earn income produced through real estate ownership without actually having to buy any such assets.Typically, income producing real estate assets owned by a REIT include office buildings, shopping malls, apartments, etc. The salient features of REITs are:

• A REIT is required to be constituted as a trust

• There is no maximum limit as to number of sponsors

• A REIT needs to be registered with SEBI

• The sponsors collectively should have a net worth of not less than 1,000 million INR and individually not less than 200 million INR

• Sponsors or its associates to have minimum experience of five years in the development of real estate or real estate fund management

https://www.pwc.com/gx/en/asset-management/assets/pdf/pwc-real-estate-going-global-2020.pdf