In a bid to fulfill its dream of Housing for All by 2022 as well as to give a leg up to the ailing realty sector – which got further hit by demonetization – the government is likely to provide more tax incentives on home loans.
According to sources, the recent rate cuts by banks have failed to increase the credit offtake as expected and, therefore, further incentives are needed to induce people to buy their dream home. And one way out is to increase tax sops on housing loans.
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In fact, ever since coming to power, the Modi government has taken several steps to boost housing. The Pradhan Mantri Awas Yojna (PMAY), launched way back in 2015 to fulfill the dream of Housing for All by 2022, was one of such initiatives, which aims to create 2 crore houses for urban poor by the year 2022, translating into 30 lakh houses per annum. The 1st phase of PMAY is expected to be completed by March 2017.
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The PM has also announced interest subsidies and higher loan eligibility for the economically-weaker sections. For instance, the government recently announced that interest subsidy of 3% would be applicable on loans of up to Rs 12 lakh and 4% on loans of up to Rs 9 lakh, under PMAY.
In the last year’s budget, the government announced tax deduction of Rs 50,000 for interest paid on a loan taken for buying a home. This deduction is in addition to the Rs 2 lakh deduction provided for a self-occupied property.
However, please note that this deduction is only available when:
* A person is buying home for the first time
* Have taken home loan from a bank of an amount not exceeding Rs.35 lakh and the value of the property does not exceed Rs 50 lakh.
* The loan should be taken between April 1, 2016 and March 31, 2017.
Budget Expectations for incentivizing housing
To keep up with the sentiments and expectations of the general public, the government may further extend the period of loan by another one year (from April 1,2017 to March 31, 2018) for people buying their first house. This will induce more people to go for home loans.
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A separate cap for repaying the principal on housing loan is also possible. “The principal repayment of a home loan falls under Section 80C where the maximum amount eligible for tax deduction is Rs 150,000. Currently, the challenge is that this tax benefit is clubbed with other deductions like life insurance premium, PPF, ELSS etc. Therefore, the government may come up with a separate cap for repaying the housing loan to encourage more people to invest in property. This would also boost the real estate sector,” says Archit Gupta, Founder and CEO, ClearTax.in.
Post demonetization, the real estate has taken a major hit and alternatively increasing the Sec. 80C deductions from Rs.150,000 to Rs.200,000 would also benefit the economy with more people opting for home loans through banking channels. This would lead to higher disposable income for people.
“Another option for the government may be to increase the tax deduction for interest paid on housing loan from Rs 2 lakh to Rs 3 lakh. This will also provide an immediate boost to the banking services sector, which is flush with funds post demonetization and is looking at avenues to lend money to the masses,” says Vikas Vasal, National Leader-Tax, Grant Thornton India LLP.
Experts are also of the opinion that the current limit of Rs 2 lakh is insignificant given the ticket sizes in cities, especially in bigger metros like Mumbai and Delhi, where an overwhelming majority of the available housing is priced at, or above, Rs 1 crore. The government should therefore increase the tax deduction limit for housing loans, especially for buyers in metropolitan cities. Also, the tax exemption limit should be auto-set to match inflationary trends in a financial year.
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Some tax experts also believe that people having a single home need to be allowed to deduct the entire amount paid as interest on home loan. For instance, currently the home loan interest deduction is capped at Rs. 2 lakh per annum for self-occupied house property and deduction of actual interest paid is allowed for a second home that is given on rent or is deemed rented. However, “nowadays buying a second home is not very common owing to high property prices. In such cases, home owners possessing a single home need to be allowed to deduct the entire amount paid as interest on home loan. This would be a welcome relief for salaried individuals since they do not have much scope for tax saving and moreover this is an expense-based deduction,” says Vaibhav Sankla, Director, H&R Block India.