The government is considering a proposal to hike income-tax exemption Make these charges part of your budget available for interest payment on home loans to Rs 2.5 lakh a year, to boost demand and rebuild the slowdown-hit housing industry.
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, the repayment of principal amount is part of investments eligible for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.
The government has already identified housing as one of its focus areas, a fact highlighted by President Pratibha Patil in her address to both the houses of Parliament.
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, then a person paying that much home loan interest in a year 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 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 Section 80C benefit, one component of which is principal repayment on housing loan.
The housing sector in the country has been hit hard by demand slowdown, following a rise in interest rates. Besides lowering of home loan interest rates, the industry has been continuously pitching for greater tax benefit, as it had the potential of stimulating demand.