The Telegraph
Sunday , July 6 , 2014
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Taxation home truth

- First-time home loan borrowers need clarity in benefits

It’s difficult for the middle and lower income people to consider buying a house with their own funds because of the rapid rise in real estate prices. So, home loans are the only hope for them to purchase a house.

High interest rates on home loans have made this route unfavorable for the common man, already battling the ever-rising inflation. The interest component in home loan is eligible for deduction from taxable income, but it was restricted to Rs 1.5 lakh for self-occupied properties till 2012-13.

In his budget speech for 2013, then finance minister P. Chidambaram had highlighted the need to incentivise the construction sector to boost the infrastructure, steel and cement industries as well as to create jobs in the highly labour-intensive sector.

Accordingly, an additional deduction of up to Rs 1 lakh on the interest component was introduced for first-time buyers of self occupied residential house under Section 80EE of the Income Tax Act, 1961.

However, the government restricted the incentive to low-cost properties by setting a threshold of Rs 40 lakh on the value of the property and Rs 25 lakh on the amount of loan.

The new section has been fairly attractive to all first-time buyers of residential property since the additional deduction meant a saving of Rs 10,000-30,000, depending on the income tax slab of an individual.

The government also said if the entire benefit of Rs 1 lakh was not utilised in fiscal 2013-14, the balance may be claimed in 2014-15. This indicated that the true objective of the government was to ensure that the entire incentive is duly utilised.

The scheme gained popularity mainly in tier-II and tier-III cities. This is because properties worth Rs 40 lakh in metros or tier-I cities will only be available in the outskirts. Such properties are generally purchased for investment or rental purposes, for which the new section was not introduced.

However, there have been some major concerns over the scheme. While introducing the section, the finance minister had strived to provide incentives to real estate and even allowed the un-utilised portion of the benefit in the first year to be carried forward to the subsequent year.

Hence, it always seemed that the scheme was here to stay for a couple of years.

The benefit under Section 80EE, however, comes with a rider: The loan must be sanctioned between March 1, 2013 and March 31, 2014. There has not been any amendment/extension of this time period in the vote-on-account budget for 2014.

Hence, it seems that the incentive has been done away with. Everyone is now expecting that the time period will be extended to March 2015.

Further, the offer was for houses valued up to Rs 40 lakh, but a person taking a loan of more than Rs 25 lakh was not allowed to get the incentive. It will be difficult for the lower and middle class people to bridge the gap of Rs 15 lakh from their own savings.

Even banks allow loans of 85 per cent of the value of the property, which would be around Rs 34 lakh for a property of Rs 40 lakh.

There have been expectations that the government will reduce the gap to make the scheme more realistic. There has not been any amendment to bridge this gap. Hence, prospective home buyers are waiting for the budget proposals to throw some light on the issue.

Those planning high-value investments in housing and not eligible for Section 80EE will also be expecting an increase in the present interest exemption limit of Rs 1,50,000.

Amid such uncertainty, the common man has to keep his fingers crossed for the budget proposals of the new government.

Sushmita Basu is associate director, tax & regulatory services, PwC India.

With inputs from Kapil Basu, senior manager, tax & regulatory services, PwC India