Tax concessions on home loan interest paid
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There is good news for house buyers. In its revised discussion paper on Direct Tax Code, the government has proposed to allow the tax concessions on the interest paid up to Rs 1,50,000 during a financial year on home loan to buy a house for one’s own use. Similarly, the government had also decided not to tax the rental income from a house property on presumptive basis, which was part of the original draft. This will also provide a lot of relief to the home-buyers.
The revised discussion paper on direct tax code said that a house, which has not been let out, the individual house owner will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property subject to a ceiling of Rs 1.5 lakh from the gross total income for the calculation of the tax. The tax benefits on the interest payment on home loan taken to buy a house for one’s own use is a popular scheme introduced by the government in 2002. This, in effect, reduces the cost of borrowing to buy a house by up to 3-4 percentage points. That means, if the home loan is available at 9%, the effective rate for a borrower because of the tax benefit on the home loan comes down to around 5%. This is a huge incentive to buy a house.
However, the department had also increased the exemption limit to Rs 3 lakh from the present level of Rs 1.10 lakh against the investments in select instruments like public provident fund, pension fund and life insurance scheme. In the DTC, the government had argued that as the exemption limit against the investments has been increased, the taxpayers will not be affected if the tax benefits on interest payment on home loan is withdrawn. However the government finally decided to revert back.
In most of the middle-class income group, after making an interest payment of Rs 1.50 lakh, it is difficult to exhaust the exemption limit of Rs 3 lakh. Therefore, if interest payment of Rs 1.50 lakh is included in the exemption limit, it will benefit a number of middle class income group people. But seeing the need for house and the contribution of the housing sector in the GDP, experts feel that the government should have continued with the deduction against the payment of interest on home loan as a separate category and not included in the overall exemption limit.
According to the revised discussion paper, gross rent will be the amount of rent received or receivable for the financial year in case of house property let out and will not be computed based upon the presumptive rate of tax on the value or cost of construction or acquisition. At the same time, the revised discussion paper also proposed that if the house property is not let out, the gross rent will be taken as nil and accordingly no deductions shall be allowed for taxes or interest paid, if the house is bought as an investment asset and not for the self use.
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