Published Editorial

Reason to cheer for first-time home buyers

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The Hindu Business Line

by

Anand Dhelia
Senior Tax professional
Ernst & Young

Buying a home, in these days of inflation, is a distant reality for many.

By introducing an additional deduction of Rs 1 lakh in the Budget proposal, the Finance Minister has given some reason to cheer to individuals who are planning to buy their first home.

At present, under the Income Tax Act (‘ITA’), an individual is eligible for a deduction of up to Rs 1.5 lakh of interest paid on the housing loan for a self-occupied house property.

An additional deduction in this respect was much awaited as these limits were introduced almost a decade ago and the costs of house properties have increased multi-fold over the period.

Conditions

Now, let us have a look at the salient conditions to avail this deduction:

Loan amount should not exceed Rs 25 lakh.

The value of the residential house property should not exceed Rs 40 lakh.

Housing loan should be borrowed from a bank or housing finance company in India.

Loan should be sanctioned during the period April 1, 2013 to March 31, 2014.

The individual should not own any other house property at the time of sanction of the loan.

Once a deduction has been claimed under this provision, no deduction can be claimed for such interest on housing loan under any other provisions of the ITA. But note that this deduction is a one-time benefit for the Financial Year (FY) 2013-14.

However, in case the deduction availed during FY 2013-14 is less than Rs 1 lakh, the balance amount could be carried forward and deduction can be claimed in FY 2014-15.

The illustration in Table 1 would give a better understanding of the deduction available. In the illustration, Scenario II is a situation where the limit for additional deduction is not exhausted during the FY 2013-14.

Table 2 provides the estimated tax savings for various income levels on account of this additional deduction for FY 2013-14.

Clarity required

There are certain aspects which would require more clarity. For instance, the provision states that the housing loan should be borrowed for acquisition of property.

However, it does not state if the property has to be acquired in the same financial year in which the loan was sanctioned. Also, it is unclear if the stamp duty, registration charges etc would be included in calculating the property value of Rs 40 lakh.

Apparently, this additional deduction would be available for self-occupied house property only, since, in case of let-out house property the entire interest paid on housing loan is available as a deduction from income from house property.

Given the competitive real estate price scenario, lower interest rates in the last few months and the above additional benefit, this seems to be the right time to buy your first home.