Union Budget 2021 India: After a disastrous 2020, the common man looks forward to announcements that will put more income in his hand and stimulate the economy at large.
Union Budget 2021-22 Expectations for Homeowners: The Union Budget 2021 will be presented in a few days and expectations are high. After a disastrous 2020, the common man looks forward to announcements that will put more income in his hand, boost economic sentiment, and stimulate the economy at large. The government has several ways to achieve these objectives.
I’d like to make my own suggestion in this regard: streamline the tax deductions for home loans into a single, enhanced deduction of up to Rs 5 lakh without any sub-limits for principal and interest. I believe this would put more income in the hands of homeowners, and also stimulate interest in real estate which could have a multiplier effect on the economy in terms of creation of construction jobs. Here’s why I think the creation of this new deduction would be a good idea.
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Higher Disposable Income Through Lower Taxation
Home-buying is a costly affair, especially in urban areas. It requires large borrowings. As per BankBazaar data, the average ticket size for a home loan in 2020 was Rs 26.67 lakh. Such large borrowings strain incomes already feeling the heat of the events of 2020. The Income Tax Act provides tax deductions for essential expenses such as home loan payments, healthcare expenses, insurance premiums, and school fees. There’s no way to escape these expenses, and therefore, the deductions that can be availed against them need to keep pace with inflation. When that happens through higher exemption of income for home ownership, it will lead to higher disposable income – a much-needed benefit in these times.
The Current Deductions Are Not Enough
The current deductions feel inadequate. For example, on an average loan of Rs 35 lakh for 20 years at 8%, the first-year interest would be Rs 2.77 lakh, comfortably clear of the current limit on Section 24B of Rs 2 lakh. Remember that this is an essential, unavoidable expense for the homeowner. If the homeowner is allowed to claim deductions on the additional Rs 77,000, he can avoid taxes up to approximately Rs 24,000 a year – around Rs. 2000 a month – which is money that can be used for discretionary spending that would stimulate the economy.
Too Many Sections Right Now
Currently, deductions against home loans can be taken under Section 80C (Rs 1.5 lakh for principal), Section 24B (Rs 2 lakh for interest), and for eligible borrowers there are deductions for interest under Section 80EE (Rs 50,000) and 80EEA (Rs 1.5 lakh). These could be streamlined into a single section for home loan deductions up to Rs 5 lakh without sub-limits for principal and interest. The limit of Rs 5 lakh would also be equal to the current limits (80C, 24B, and 80EEA) put together.
Some Deductions Discriminatory
Also, streamlining the sections would end the discrimination inherent to 80EE and 80EEA which can be availed only by first-time home buyers for properties of a certain size. This leaves out many people whose first properties may not fit the square footage or time cut-offs contained in these sections, or people upgrading out of necessity to bigger homes due to larger families, or even people changing cities for professional reasons and being denied the tax breaks on their second home purchases.
80C Is Too Crowded, No Longer Provides Full Value
80C is perhaps the most popular tax deduction because of the number of options it provides. However, for urban taxpayers especially, it’s become too crowded and is no longer providing full value for the necessary expenses they have to bear. For example, for a person with a home loan and school-going children, essential expenses would include home loan payments, life insurance premiums, and school fees apart from provident fund contributions. For such a person, it’s very easy to shoot past the limit of Rs 1.5 lakh and, therefore, he’s not getting tax breaks for expenses he cannot avoid. To relieve such taxpayers, it would be good to remove at least the home loan principal payments into the new section for home loans payments.
I submit that these measures may help put more income in the hands of the taxpayers, boost economic sentiment after a tough year, and ignite interest in construction which would hopefully have a multiplier effect on the whole economy.
(The writer is CEO, BankBazaar.com)