TNN | Jul 11, 2014, 02.06AM IST | Times of India
Why rent when you can buy and beat tax? The Budget made purchase of homes more attractive, at least for the middle class, by raising deduction against interest payment on home loan from the taxable income to Rs 2,00,000 from Rs 1,50,000. This will enable a home buyer to save an additional amount of Rs 15,450 from his or her tax liability.
It will also, in effect, lower interest rates for home loans. So say that one has taken a loan of Rs 25,00,000 to buy a house at an interest rate of 10% for 20 years, the EMI will be around
Rs 24,125, which adds up to Rs 2,89,500 annually. Out of this, Rs 2,50,000 will go towards interest payment and the rest — Rs 39,500 —will be used for principal repayment. Post-Budget, the buyer can avail a deduction of Rs 2,00,000 from his or her taxable income as the interest payment will be Rs 2,50,000 in the first year. This will enable the buyer to save Rs 61,800 from tax liability if his or her income is in the highest tax bracket of 30.9%. The net tax outgo after adjusting for the savings in tax will be only Rs 1,88,200. As the loan amount is Rs 25,00,000, the net interest rate will work out to only 7.53%. But if the borrowed amount increases, the net interest rate will increase. So if the loan amount is Rs 1,00,00,000 at 10% rate, the net interest rate will be 9.38%. This is because the tax benefit remains at Rs 61,800 only.
Experts say that in big metros like Delhi, Mumbai and Bangalore where most flats cost upward of Rs 1 crore, it would make little difference to a buyer.
Pankaj Kapoor of property research firm Liases Foras said the relief was marginal for those who live in tier-one cities. “The rebate should have been much higher,” he said. “In Mumbai, the average cost of a flat is Rs 1.2 crore. On this, the monthly EMI itself would be around Rs 1 lakh, of which 80% goes towards interest. This exemption is not enough to promote housing in category one cities,” he said.
Property consultant Ashok Narang said the move would benefit the salaried class to some extent. “Flat buyers in two-tier cities where prices are comparatively much lower will feel the difference,” he said.
Abhisheck Lodha, managing director of Lodha Group, said the increase won’t change anything for flat buyers in big cities like Mumbai. “But it is an incremental difference for homes in the range of Rs 25 lakh to Rs 50 lakh, which are available in the Mumbai metropolitan region,” he said.
Added Pranay Vakil of Praron Consultancy, “If you want to encourage housing, no matter what interest you are paying, it should be exempted from taxation. It’s a basic need.” The industry had demanded that the limit be hiked to at least Rs 5,00,000, which could have covered repayment of loan of Rs 100,00,000 for quite some time.
Another Budget proposal allowing corporate social responsibility in slum redevelopment was welcomed by developers like Boman Irani, who said it would have a big impact in Mumbai, where half the population lives in shanties. “Big companies could pump in at least a couple of thousand crores in slum projects,” he said.
The relaxation in FDI norms for real estate would also open up a new stream of cheaper money for developers, said experts. The FDI limit has been reduced from 50,000 sq m to 20,000 sq m and minimum investment from $10 million to $ 5 million.
“The finance minister’s vision for housing is the first positive signal that this government intends to listen to the real estate industry,” said Irani.
The tax pass through status for Real Estate Investment Trusts (REITs) to avoid double taxation will bring in more investments to the sector, said industry experts.