Housing for all
With several bold initiatives, Budget 2018 will provide the government with the opportunity to fulfil housing expectations of millions in the country, writes Ankur Dhawan.
The "Housing for All by 2022" mission has set the stage for a robust recovery in the residential property market. In the past two years, we have seen an unprecedented focus on reforms channelised through the Benami Transactions (Prohibition) Amendment Act 2016, demonetisation, Real Estate Regulatory Act (RERA) and the Goods and Services Tax (GST) regime. Thus, this time, the Budget for FY2018-19 will be much more critical than before. The provisions, if moved towards positive directions, will have the power to continue the momentum and cement the homebuyers' confidence.
While so many tough decisions have already been made, it will be worthwhile to further rationalise the direct tax structures impacting homebuyers. I believe that there is room for improvement in some of the prime income tax (IT) provisions that are meant to incentivise homebuyers.
Deduction on home loan interest: The IT Act has provisions under which a home buyer can claim a deduction on home loan interest paid towards an under-construction property, in five equal instalments for five financial years. But this deduction is included in the overall deduction amount of Rs 2 lakh that one can claim in a financial year. Also, the condition of equal deduction during five years leaves limited room for homebuyers to claim the benefit of the current year's interest paid. Buyers can claim the benefit only after receiving possession of the property and thus, there is no benefit during the construction period. Given that so many properties are delayed in possession, the interest component paid during construction can also become very high.
Sample this: A home buyer pays Rs 7.5 lakh over five years of construction period as interest towards home loan. In this case, he can claim Rs 1.5 lakh every year, but then this amount is included in the overall limit of Rs 2 lakh, thus making no significant impact on his taxable income. To provide relief to homebuyers as well as encourage investment in under-construction properties, the government should introduce a separate tax benefit for pre-EMI interest during the construction period.
Deduction on interest paid after completion for let-out properties: As budget 2017 has imposed a limit of Rs 2 Lakh on deduction of interest paid for non-self-occupied properties under Section 71 of the Income Tax Act, investment in properties for rental has become less attractive. Rental housing is an important part of the housing industry as it provides a roof to the people who cannot afford their own houses. To make rental housing more attractive, the government should increase the limit to Rs 3 lakh.
Section 80EE: Under Section 80EE of the IT Act, first-time homebuyers are entitled to claim deductions of up to Rs 50,000 a year towards the payment for home loan interest, in addition to the limit of Rs 2 lakh defined under Section 80C of the Act, although there are conditions attached to it. First, the home loan should be taken in the period between April 1, 2016, and March 31, 2017. Second, the value of the property should be below Rs 50 lakh.
There is a need to review these two conditions. The threshold of property value as Rs 50 lakh deprives many homebuyers in metro and Tier 1 cities to derive the benefit of this deduction. Even the Reserve Bank of India (RBI) defines properties under Rs 65 lakh as affordable properties in metros and Tier 1 cities. Therefore, this threshold should be raised to Rs 65 lakh.
Section 54 & 54F: Under these sections, a home buyer can claim an exemption for long-term capital gains if he/she invests the sale proceeds of one property to buy another within three years. However, the person can lose this benefit if the property is not completed within three years. This condition penalises a homebuyer for a reason which is out of his control. Residential projects take anywhere from three to seven years and given the present scenario, the period of three years is not realistic. This period should be raised to five years.
The forthcoming Budget presents an opportunity to further build the momentum to fulfil the core need of housing for millions and, given the kind of focus and push by the government, the Finance Ministry should leave no stone unturned in contributing towards the cause of "Housing for All by 2022".
(The author is Chief Investment Officer, PropTiger.com. The views expressed are strictly personal)