Home is a basic need of any person in addition to bread and clothes. With rising prices of houses, it is almost impossible for an average person to buy a house without borrowing for it either through housing loans or through loans from friends and relatives. In this article, I wish to point out why the government should take out the present tax benefit from Section 80C and introduce separate deduction for the principal repayment of housing loan.
Present provision for repayment of home loan
Section 80C of the Income Tax Act allows an individual and an HUF deduction up to Rs 1.50 lakhs every year in respect of repayment of the principal amount of home loan taken for purchase or construction of a residential house together with many other eligible items.
The benefit of repayment of home loan is available provided the money is borrowed from some specified institutions/entities such as banks, housing finance companies. This benefit can also be availed by employees who have taken the home loan from their employer, which is either a public sector company, university, or a local authority or a cooperative society, or any statutory authority or corporation established by law passed by central or state legislatures or even a public company. The deduction is available for the principal amount repaid after completion of the construction and cannot be claimed before that.
Since the limit of deduction is applicable for various items taken together such as repayment of the principal amount of home loan, life insurance premium, tuition fees of children, contribution to Provident Fund and Public Provident Fund, ELSS investments, etc. These many items generally crowd out the principal repayment of home loan as the basic limit of Rs 1. 50 lakh gets exhausted by some mandatory items such as Life insurance premium, school fees, contribution towards provident fund/NPS. So effectively the benefit for repayment of home loan gets overflowed due to so many eligible items and thus, depriving the taxpayers a legitimate claim for the amount spent or invested by him.
Basis for recommendation
Initially, the limit of Rs 1 lakh was fixed in 2003 which was increased to Rs 1.5 lakh from 2014. Applying average inflation of 6% over the period of past 16 years, the deduction ceiling should be around 2.54 lakhs as of today.
On the one side the limit of deduction remained stagnant but on the other side more and more items were added in the list over the period such as contribution to Senior Citizen Saving Schemes, National Pension System, Tax saving fixed deposits, Sukanya Samridhi Scheme, etc. Moreover, the amount of housing loan required for buying the house has multiplied many folds during this period due to appreciation in the cost of residential houses over the same period. Even in most of the cases, the amount of principal repayment on a housing loan itself exceeds the limit of deduction of Rs 1.5 lakh, set under Section 80CCE. In view of the overcrowding of items eligible under Section 80C, 80CCC and 80CCD(1) and need for larger home loans, I urge the finance minister to introduce a separate deduction for principal repayment of housing loans, in the ensuing budget.
Since all the taxpayers are not able to avail the home loan due to various reasons including bad credit history, I urge the finance minister to consider extending the benefit of housing loan principal repayment, to cover money borrowed from anyone, including friends and relatives. Likewise, with rampant delays in completion of various housing project where the EMIs for principal repayment starts even before completion of the construction for which no tax benefit is available presently, the FM should consider allowing the taxpayer this tax benefit, even on principal repayments that are made before completion of the construction either in the year of payment or on amortisation basis after completion of the construction. Similar tax benefit for interest paid during construction is presently allowed to be amortised in five equal instalments from the year in which construction is completed.
I am sure the Finance Minister will listen.
The writer is a tax and investment expert and can be reached on firstname.lastname@example.org and @jainbalwant on twitter