Finance minister P Chidambaram?s proposal to offer additional tax benefit on home loans to first time buyers on loan amount of less than R25 lakh could boost credit demand in tier II and tier III cities, according to bankers.
Bankers say the move will give an additional push to encourage home buyers in smaller cities along with the expected decline in interest rates. ?With the interest rates on a downtrend this added tax benefit could bring on board those buyers who were until now sitting on the sidelines waiting for the right time to buy a new house,? said Abraham Chacko, executive director, Federal Bank.
He added banks will see a decent spur in housing loan demand from smaller cities, where growth was rapid, as a result of the new government policy. In the Union Budget for the next financial year, the government announced a deduction of R1 lakh on housing loan interest undersection 80EE. This would be in addition to the existing tax benefit of R1.5 lakh under section 24. The added tax benefit announced by the finance minister will be for those individuals who will take loans between April 2013 and March 2014.
?When tax benefit of R1.5 lakh on home loans was first introduced, home loans in the banking system went up by 70% within one and a half year. So the latest move by the government will definitely increase first time home buyers,? said Ram Sangapura, general manager (retail), Central Bank of India.
He also said that besides Mumbai and Delhi, all other cities will see a spike in home loans as individuals with adequate funds will also opt for loans to get a tax savings.
Bankers expect the policy to help them boost their priority sector lending and meet their targets. According to Reserve Bank of India, loans to individuals up to R25 lakh in metropolitan centres with population above 10 lakh and R15 lakh in other centres for purchase or construction of a dwelling unit per family are classified as priority sector lending.
?Home loan for the sub 25 lakh will mainly benefit people outside the metros and from the banks perspective it is good for them to meet priority sector norms,? Jaideep Iyer, senior president, financial management, Yes Bank.