[ecis2016.org] Many believe that the tax benefit limit of Rs 2 lakhs on interest payment on home loans is extremely low, considering the prevalent rates of properties across the country
There are certain income tax benefits, associated with money borrowed for the purchase or construction of a house. At present, the income tax laws provide benefits on interest payments and repayment of the principal amount on home loans. However, there are some provisions that can be deemed unfair, vis-à-vis interest allowance, which the finance minister should try and correct during this budget.
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Step-motherly treatment to borrowers of self-occupied property
When it comes to allowing interest benefit on money borrowed for the purchase or construction of house, the law treats a property which is occupied by the owner differently from a property which is let-out or is deemed to have been let-out. For a self-occupied property, the tax payer can claim interest benefits of up to Rs 2 lakhs in a year, including interest that he is entitled to avail when the property is under construction. Against this, a person who borrows money for reaping profits from the appreciation in the property’s price, is allowed deduction for full interest payment. Ideally, this should be reversed and a person who borrows money for reaping profits, should not be allowed to take the benefit of interest arbitrage, while genuine borrowers should be allowed full deduction on interest payment.
Moreover, the limit of Rs 2 lakhs is extremely low, considering the prevalent rates of properties. For example, even a small house in Mumbai may cost Rs 1 crore. If the buyer takes a loan for Rs 80 lakhs, the annual interest liability comes to Rs 7.6 lakhs, at the prevailing average home loan rate of 9.50%. If the government does not wish to reverse the existing policy, it should at least remove the limit of Rs 2 lakhs, with respect to one self-occupied house property and bring it on par with let-out property.
Restriction on deduction of interest for delayed completion
The present law also makes a distinction between properties, based on whether its construction has been completed within three years from the end of the year in which the money was borrowed, for the quantum of interest deduction. If the construction of the house is not completed within three years, the allowance on interest is only Rs 30,000 per year. However, if the construction of the house is completed within three years, the amount of deduction available is Rs 2 lakhs. Nowadays, a majority of home buyers, take home loans to buy under-construction houses from developers, where delays in completion of the project are possible. So, it is unreasonable on the part of the government, to penalise a person who is already paying interest on the home loan and rent for the accommodation occupied by him.
Moreover, the stipulated period of three years for completion of construction, does not match ground realities, where the average delay in handing over possession ranges from 18-24 months. These numbers pertain to the delay in completion of construction and are not the actual time taken to complete the construction. Consequently, very few home loan borrowers who book under-construction houses, can claim the full benefit of Rs 2 lakhs.
(The author is a taxation and home finance expert, with 30 years’ experience)
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