Budget: Watch out for the tax provisions relating to home loans

Softer interest rates for home loans have led to an uptick in residential property registrations across India. The icing on the cake is that repayment of principal and the interest amount provide various tax breaks, which help reduce a taxpayer’s total Income-tax (I-T) outgo.
For instance, under section 80C of the I-T Act, the principal is allowed as a deduction from the taxpayer’s gross total income (subject to an overall cap of Rs.1.5 lakh with other eligible investments). Under section 24, the interest payable on ‘self-occupied’ property is subject to a maximum deduction of Rs. 2 lakh.
However, it should be noted that deduction of interest on housing loan from a self-occupied house property is not available if the taxpayer opts for the new ‘simplified’ personal income tax regime. Ditto, in such cases, the benefits under section 80-C are not available.
Tax experts and professional associations call for several amendments in the I-T Act to alleviate the challenges faced by home buyers, which in turn would boost the real estate sector. Some of the issues, which need a relook are detailed below.
Book an apartment, pay EMI interest, but tax deduction is available in the future
While booking an apartment is sometimes cheaper, the I-T Act permits a taxpayer to claim the total interest paid during the pre-delivery period as a deduction in five equal instalments starting from the financial year in which the construction was completed or the taxpayer acquired your apartment (generally this denotes the date of possession). The Chamber of Tax Consultants (CTC) in their pre-budget memorandum, refer to Section 23 (Explanation to the Second Proviso). They point out that “Though taxpayers have to pay EMI interest from the date of taking the loan, the deduction is postponed to future years, putting more financial burden on the borrower, who may also be bearing the brunt of rent expenses. Many times, the projects are delayed, this adds further burden on the taxpayer.” CTC has suggested that the deduction for interest payable during construction period must be allowed in the year of payment.
Cap on interest deduction:
Interest payable on ‘self-occupied’ property is subject to a maximum deduction of 2 lakh under the head ‘Income from house property’. It can be set off against other income heads of income, which includes salary income, in the same year. This reduces the total I-T liability. But to claim this, it is essential that the acquisition or construction is completed within 5 years from the end of the financial year in which the loan was taken; else the deduction is limited to 30,000.
Hinesh R. Doshi, chartered accountant and past president at CTC says, “In view of the rising prices of real estate and current inflation rate, the existing interest deduction limit of Rs. 2,00,000 and Rs. 30,000 needs to be increased considerably. This limit of Rs 200,000 was applicable from April 1, 2015 almost seven years ago, since then real estate prices have almost doubled.”

Hinesh R. Doshi, chartered accountant and past president at CTC
Additional tax break for low-cost homes ends on March 31, 2022:
An additional tax deduction of up to Rs 1.5 lakh had been introduced for interest on home loan taken during the period April 1, 2019 to March 31, 2022 for purchase of residential house with stamp duty value up to 45 lakh. However, the individual should not own any other residential property at the time of sanction of loan. Doshi is of the view that section 80EEA must be amended and the time limit of March 31, 2022 must be extended by a few years.
Repayment of home loan taken from non-banking sources doesn’t qualify for a tax break
Only the interest component of a loan taken to buy a house, from a non-banking entity, such as from an employer, friend or private lender is allowed as a deduction. The repayment of the principal amount is not eligible for a deduction under section 80C. Moreover, the extra benefit of Rs. 1.5 lakh under section 80EEA is also not available.
Doshi says, “There are many prospective home loan borrowers who are not in a position to obtain a home loan from banks/financial institutions due to low CIBIL rating or legal issues because of which the bank/financial institutions refuse to grant loan to such borrowers. It is recommended that the existing provision of section 80EEA and 80C should be amended to include borrowers who obtain loans from private sources or from non-banking finance companies.”
Cumulative cap on deduction of principal under section 80C
A deduction of Rs 1.5 lakh can be claimed under section 80C for the repayment of the principal of a home loan taken for the purchase or construction of a new house only. This limit is inclusive of all investments and expenditures qualified for deductions under section 80C such as Public Provident Fund (PPF), Employees' Provident Fund (EPF), equity-linked savings scheme (ELSS) etc.
“A separate deduction of Rs. 1.50 lakh should be added to existing limit of Rs 1.50 lakh for repayment of housing loan. Also, the threshold limit of Rs. 1.50 lakh for availing deduction of repayment of principal amount of housing loan shall be enhanced to Rs. 2.50 lakh so as to make housing loan affordable to every citizen of India,” says Doshi.
He also points out that if the taxpayer sells the house property, within five years from the end of the year in which it was purchased, all benefits in respect of repayment of the home loan that were availed of under section 80C get reversed. These get taxable in the year of sale of property. This provision needs a relook.