Income Tax 28 Jan,2020
Higher deduction for housing loan
Sudhakar SethuramanPartner with Deloitte India
Radhika ViswanathanDirector, Deloitte Haskins and Sells LLP
Kavita JagadeesanManager, Deloitte Haskins & Sells LLP

The dawn of a New Year brings with it joy, celebrations, resolutions and of course expectations!! The prospects could revolve around various aspects such as personal, financial, political, and so on. Budget time raises financial hopes among people with everyone having views on what they are looking for or about the kind of Budget proposals that would be coming through.

While this has always been so, the situation today seems different with heightened expectations fueled by the global economic situation, and rising prices. Taxpayers are looking up at the Finance Minister for concrete relief either in the form of lower tax rates, moderated tax slabs or increase in thresholds for deductions. In this article, we'll deal with one such significant expectation viz. higher deduction for housing loan repayment.

If owning a home is everyone's dream, it is also an investment option for many. Availing a loan for housing has been a lucrative option as it helps claim higher tax deduction. Perhaps this is also one of the reasons that contributed to the tremendous growth of housing in suburban areas across cities in the country. You may wonder what has changed on the tax front? Before we get to this, let us go back a few years with respect to tax benefits for a housing loan.

Deduction under the head house property

First and foremost in the list of tax benefits is the deduction that can be claimed for interest payable on home loans. This goes back to the 1922 Act which provided for a deduction (referred to as "allowance" in this statute) for interest on mortgage, where the property was subject to mortgage and for interest payable on borrowed capital where the property was acquired, constructed, repaired or renewed with such capital. The Income tax Act of 1961 also provided for such deduction. It may be interesting to note that there was no limit on the amount that could be claimed as a deduction in the 1922 Act. These were brought in at a later point of time through amendments dependent on the prevailing economic scenario - housing loan interest rate and affordability and the limits were applicable dependent on the occupancy of the house. Also, having considered the interest outflow during pre-construction period, the Finance Act, 1983 introduced deductions for such interest in equated instalments. The legislative amendments were more or less in line with expectations as there was no such threshold prescribed for let-out housing properties.

Today, an individual can claim deduction up to INR 2 lakh towards interest payable on housing loan irrespective of whether the property is let-out or self-occupied. This was introduced by the Finance Act of 2017 claiming to be in line with international tax practices. Prior to this an individual could claim full deduction for interest paid on let-out properties and the resultant loss (if any) without any limit could be set-off against salary income. As a result, consequent to the amendment, this category of taxpayers had to pay more taxes which in turn reduced their take home pay.

The government has also provided some relief by doing away with the concept of deemed let-out for the second self-occupied property.

Deduction from total income under section 80C

Next is the deduction that can be claimed for repayment of principal. Though it does count as an eligible deduction, in practice it does not provide much relief. Given the ceiling of INR 150,000 for deduction under section 80C is more or less exhausted by contributions to provident fund or insurance premia by the salaried class, this does not result in any additional benefit.

Benefits for first time home buyers

As we are aware, the government has embarked on an ambitious mission of "Affordable housing for all by 2022". In addition to the multitude of policies towards this, there are also tax benefits for first time home buyers. The proposals were brought in by two different Finance Acts and relate to loans sanctioned between April 2016 and March 2017 and April 2019 and March 2020. These are deductions that can be claimed from total income of an individual and are in addition to the deduction available under the house property. Though there are conditions that have to be fulfilled for availing these deductions (for e.g. threshold limit for loan, stamp duty value of property), one can safely say that these measures could help promote investment by the common man, in property. This results in ownership of asset for the individual besides growth of the real estate sector.

Impact on real estate sector

The move to restrict deduction for interest on home loan to INR 2 lakh appears to have been driven by an aim to promote first time home buyers. The smart city projects and Pradhan Mantri Awaas Yojana, also encourage individuals who do not own a house property, to invest in property. Further, property prices also see a downward trend when lesser number of investors participate. While this could benefit the common man, one cannot rule out the fact that investment in property was viewed as a lucrative one by the salaried class, and tax deductions only helped in this process. Therefore, capping the deduction to INR 2 lakh has come as a dampener, weaning away this category of taxpayers from investing in property.

Expectations from the Budget

It is important to balance the needs of all sections of the population. If tax benefits for first time buyers is a populist measure, capping on the deduction under section 80C has certainly not helped the cause for a large section. The Finance Minister could look at enhancing the quantum of deduction currently available and restore to the earlier ceiling for claiming interest loss in case of let-out properties. Besides, deduction for principal repayment could be carved out as a separate provision which would go a long way in promoting investment in property.

Information for the editor for reference purposes only

Sudhakar Sethuraman is Partner with Deloitte India.

Radhika Viswanathan is Director and Kavita Jagadeesan is Manager with Deloitte Haskins and Sells LLP.