The last three years have been good for homebuyers. Low interest rates amid the Covid-19 pandemic outbreak and subdued home prices fuelled rising demand for homes as people shifted to working remotely as offices shut down.
Home loan rates have since gone up, but demand for housing is still intact. Experts believe that to sustain demand, the government should introduce homebuyer-friendly measures in Budget 2023.
Separate deduction for home-loan principal repayment
This is a long-pending demand. The deduction limit under Section 80C is up to Rs 1.5 lakh. But the basket of eligible investments and expenses for this deduction is packed with nearly 10 items, one of which is principal repayment on a housing loan.
In most cases, people exhaust the 80C limit with the mandatory contribution to the employees’ provident fund and children’s tuition fee. If left with some room, the premium on life insurance policies fills that gap. Hence, there is hardly any room left to claim a home-loan deduction on the principal amount.
“Ideally, a separate section should be carved out permitting allowances linked to property and the consequential stamp duty. It would be like sprucing up the Section 80C cobweb, which has, over the years, become a ‘grandpa’ provision in the Income Tax Act,” says Shailendra Kumar, chairman, TIOL Knowledge Foundation is a fiscal think-tank.
If not for a second or third house, Vivek Jalan, partner, Tax Connect Advisory, a multi-disciplinary tax consultancy firm, believes that the government should consider a separate deduction for first-time home buyers. Jalan says that given the increasing average ticket size of house purchases in most mid-to-large cities, it is seen that the value of a house can be almost five times the annual income of a middle-class person.
Hence, in case the annual income of a person is say Rs 10 lakh, then he would be buying an apartment with a price of at least Rs 50 lakh to just about meet his standard of living. This, in turn, means that he would require a loan, to be repaid over 10 years or so. The buyer would therefore want a tax benefit that is more than the deduction granted in Section 80C. Given such situations, experts have called for a separate section to be introduced, with a deduction per annum of Rs 2.5 lakh specifically for the first house purchased by an individual.
Enhance Section 24b
Besides principal repayment, a borrower also needs to pay interest on a home loan. Given that home buying needs a large amount of money, many borrowers take huge home loans. As a result, a big chunk of their income goes into servicing interest on the home loan. For many,yearly interest payments on home loans are much higher than the upper limit of the deduction they can claim.
“The deduction limit under Section 24b (up to Rs 2 lakh a year) was last enhanced in 2014 and an upward revision is long overdue,” says Pradeep Aggarwal, Chairman, Signature Global.
With policy rates increased by 225 basis points this year, home loan interest also went up parallelly. Therefore, an outgo in the form of interest is set to increase for most buyers. And that has led to the demand to enhance the deduction limit against interest payment.
“This year we witnessed a significant increase in policy rates by the central bank, which eventually (translated to) increased home loan rates. Considering this, we believe that there is a need to hike the Rs 2 lakh tax rebate on housing loan interest rates to at least Rs 3 to 4 lakh — this will help sustain the healthier demand for housing, especially in the affordable and mid-segment categories,” says Aggarwal.
Archit Gupta, founder and CEO of tax and investing platform Clear, agrees that there is a need to enhance the deduction limit. “With the RBI rate hikes, home loan interest rates could go up. This could overstretch those who are paying EMIs, straining their ability to save and invest, and also deter people from entering the home-loan space. The government could look at supporting them by increasing tax benefits on home-loan interest payment, bringing it to Rs 2.5 lakh or Rs 3 lakh from the current Rs 2 lakh.
Relaxing eligibility criteria for an additional tax deduction on interest
Housing for all has been a big target of the current government. In a bid to incentivise home buyers in the affordable housing segment, the government has introduced additional benefits in the form of deductions on home-loan interest under section 80EE and 80EEA. However, given the tight criteria, such as size of the property, maximum price and loan amount, not many are able to reap the benefit of additional deductions.
Industry stakeholders and experts believe that the government should look into the eligibility criteria of section 80EE and 80EEA and extend the benefit, so that more home buyers can take advantage.
“The benefit of section 80EEA in the case of a loan taken by a taxpayer on any home should be extended beyond 31 March 2022 along with an increase in the limit of stamp duty value from Rs 45 lakh to Rs 80 lakh in the case of metro cities. Moreover, Section 80EE should be extended further so that new home buyers can benefit from the interest deduction of Rs 50,000,” says Sandeep Sehgal, Partner – Tax, at AKM Global, a tax and consulting firm.
Further, the condition of not owning any residential house property, in Section 80EE and 80EEA, should be substituted, allowing such deduction to a second house property,” added Sehgal.
Given that the housing segment is doing well in terms of demand and transactions, the real estate sector is on a growth trajectory, says Aarti Raote, partner, Deloitte India, and providing sops for home purchases may not be a priority for the finance minister. However, for a member of the middle-class, a home purchase is still a difficult proposition.
The deduction u/s 80EEA of Rs 1.50 lakh for interest payments is subject to meeting specific conditions. One of the conditions is that the loan for the house should be sanctioned during the period between 1st April 2019 and 31st March 2022. Raote believes that the government can look at extending the date for 80EEA by another year to ease the financial burden on new buyers in this category.
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