Rs 15 Lakh Cap On Cash Holding May Hit Real Estate Market

India's real estate sector, already suffering a slowdown for a couple of years, might be in for more trouble if the recommendations of a Supreme Court-appointed special investigation team (SIT) on unaccounted money are implemented. The SIT has suggested that cash transactions of more than Rs 3 lakh in value be completely banned, and cash holding with individuals be restricted to not more than Rs 15 lakh.

What has the SIT said?

The SIT, headed by Justice M B Shah, has suggested that changes be made to the Income Tax Act to effect a total ban on cash transactions above Rs 3 lakh, and specific provision be made in the Act to tag such transactions “illegal, invalid and punishable”. The SIT, set up in 2011, has also said that this “limitation on the cash transaction can succeed only if there is limitation for cash holding”, and suggested capping it between Rs 10 and 15 lakh. The recommendations are aimed to crack down on the flow of unaccounted money, or black money, and help boost the government's revenue.

Flow of black money into real estate

Real estate is among the sectors that see high-value transactions, and use of unaccounted money in the sector hits the government's earnings. According to the fifth report of the SIT on unaccounted money, the income-tax department seized about Rs 471 crore of cash in its searches carried out during the financial year 2015-16.

Stamp duty charges on property transactions in India – between 4 and 10 per cent, depending on the state in which you are buying your property – are much higher when compared with developed economies, where they are generally kept between one and two per cent. This, in a way, makes people understate the on-paper value of their transactions which results in huge revenue loss for the government. This is where the cash comes into the picture. By paying a part of the total transaction value in cash (commonly known as black money) and understating the value of the transaction on papers, a home buyer is able to save on stamp duty charges, while the seller saves on capital gains tax.

What will happen if the SIT recommendations are implemented?

If the recommendations of the SIT are accepted, you will not be able to pay more than Rs 3 lakh in cash for doing any transaction, and you will not be able to keep more than Rs 15 lakh in cash at any point of time. This will impact the country's real estate sector in several ways.

Likely impact on real estate

• The laws governing property transactions in India are quite paradoxical. High stamp duty charges encourage the use of black money in property transactions; going through the right channel would increase the burden on both the buyer and the seller. When an individual's cash holdings are restricted, India's real estate sector might actually see fewer transactions. However, this will bring more transparency in the sector and the government's revenue will get a boost.

• The SIT in its report has cited examples from Europe, where many countries have restricted cash holdings for individuals to check unaccounted transactions. However, as far as real estate is concerned, stamp duty charges in these countries are much lower, and property prices have saturated in their major cities. For an emerging economy like India, where property prices have become very high over the past decade, authorities will need to do more than restricting cash holding, to ensure the sector jumps out of its current stagnant phase.

• Sky-high property prices have been keeping buyers off the market, and this has led to a slowdown in India's real estate sector. Rationalising stamp duty, registration charges and capital gains tax could be a more effective way of encouraging the common man to go for fair practices.

For regular updates on real estate, click here