Home loans may help you save more on tax

Home loans may help you save more on tax
The Economic Times, June 15, 2009, Page 1

I-T Exemption On Housing Loan Interest May Go Up To Rs 2.5 L

Deepshikha Sikarwar NEW DELHI

THE government is considering a proposal to hike the income-tax exemption on interest payment on home loans to Rs 2.5 lakh a year, to boost demand and help the damaged housing industry rebuild.

The ministry of housing and urban development has urged finance minister Pranab Mukherjee to make an announcement to this effect as part of his Budget presentation in early July, a government official said on condition of anonymity.

At present, taxpayers taking housing loans are eligible for income-tax exemption on interest payment of up to Rs 1.5 lakh every year. Besides this, repayment of the principal amount is part of the investments eligible for benefit under Section 80C of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom house in big cities costs at least Rs 25 lakh. Considering a person takes a loan of Rs 20 lakh at an interest rate of 9.5%, he would pay Rs 1,88,493 towards interest alone in the first year. His annual interest payment in the first five years would be more than Rs 1.5 lakh.

If the exemption limit is hiked to Rs 2.5 lakh, a person paying a home loan interest of the same amount annually will save an additional Rs 31,000 in tax every year. This saving of over Rs 2,500 a month would be significant for most borrowers, making home purchases more affordable.

However, as per existing norms, the tax benefits start flowing in only after the construction of the house is completed, which usually takes 2-3 years in the case of builder flats. The housing industry has urged the government to allow for the deduction as soon as loan repayment starts as it would give substantial relief to home buyers and boost demand.

The budget documents do not provide an estimate of the revenue forgone on account of this exemption but it is unlikely to be very significant. Of the total Rs 38,107-crore tax revenue forgone on account of tax exemptions to individuals in 2007-08, nearly Rs 30,000 crore is on account of the Section 80C benefit. The housing sector in the country has been hit hard by demand slowdown following a rise in interest rates and property prices.