Budget 2019 India: As it is impossible to avail the full benefit with a Rs 45 lakh property, this benefit should have been extended to properties of higher values where the borrowing may be much higher.
Union Budget 2019 India: In her first Union Budget speech, Finance Minister Nirmala Sitharaman has announced an additional tax deduction of Rs 1.5 lakh for interest payments on home loans. This is a welcome announcement, but there are limitations in this deduction that will prevent borrowers from getting full value out of the revised deduction limit.
Most homeowners will testify that the interest component of their home loan is tough on their finances. At the start of your home loan tenure, a large part of your EMIs goes towards interest. Earlier, Section 24B of the Income Tax Act allowed you a deduction of up to Rs 2 lakh per year on home loan interest. Now, a new section 80EEA provides you an additional Rs. 1.5 lakh deduction, taking the total deduction for home loan interest to Rs. 3.5 lakh. But to avail the new deduction, your property value needs to be no more than Rs. 45 lakh and the home loan needs to be obtained in Financial Year 2019-20.
Even if we assume a loan-to-value ratio of 90%, which is as high as it can go for a property of Rs 45 lakh, we see that the interest payments even in the first year aren’t enough to hit the Rs 3.5 lakh limit.
For illustrative purposes, we’ll ignore the Rs 35 lakh limit imposed under the Pradhan Mantri Awas Yojna (PMAY) scheme for properties up to Rs 45 lakh. Let’s assume you’ve borrowed 90% of Rs 45 lakh, and so you have a home loan of Rs 40.5 lakh.
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Let’s also assume the rate of interest on this loan is 8.7%, based on prevalent rates, and the tenure of the loan is 15 years, which is the number of years that the FM quoted in her budget speech.
This gives you annual interest payments as follows: Rs. 3.46 lakh in the first year, Rs. 3.34 lakh in the second, Rs. 3.20 lakh in the third, Rs. 3.06 lakh in the fourth, Rs. 2.90 lakh in the fifth, Rs. 2.72 lakh in the sixth, and Rs. 2.53 lakh in the seventh.
As you can see, even in the first year where the interest burden is the highest, you do not hit the revised Rs 3.5 lakh limit and the limit continues to drift further away from your actual interest payments as the loan tenure progresses. This basically means that anyone borrowing at even the highest LTV for a Rs 45 lakh property will not be able to avail the full benefits of the new deduction.
Let’s be clear – the additional deduction is great. It will help the borrower of the above loan save a whopping Rs. 7.24 lakh through additional deductions over the first seven years of the loan tenure alone. Calculating taxes for some in the flat 30% slab, this would lead to savings of Rs. 2.17 lakh before cess. This works out to savings of Rs. 2,583 per month, or Rs. 31,000 per year.
Such savings would certainly benefit the following set of people: those buying budget homes in big cities, or those buying homes in smaller cities. However, as it is impossible to avail the full benefit with a Rs. 45 lakh property, this benefit should have been extended to properties of higher values where the borrowing may be much higher.
The costs of buying even a modest 2BHK in metros are astronomical, and any new deductions can alleviate the pains of the taxpayer. Nevertheless, this still is a much-needed addition to the 24B limits, and I hope it will be extended in the future to all home owners regardless of their property cost.
(The writer is CEO, BankBazaar.com)