The government may modify the draft direct tax code to retain tax shelters on interest and principal repayments for home loans to make the proposed new code more attractive for the average Indian, a finance ministry official told ET.

The proposed direct taxes code, which has been unveiled for public debate and is due to become operational from April 2011, does not provide tax incentives to loan-funded house purchases that are for personal use.

At present, taxpayers are allowed to deduct from their income the interest paid on home loans to a maximum of Rs 1.5 lakh every year. In addition, the repayment of the principal amount is also allowed to be included within the rebate available under section 80C, which has a maximum limit of Rs 1 lakh.

The draft code, billed as a comprehensive reform of the direct taxes regime, has suggested increasing the exemption limit under section 80C to Rs 3 lakh, but the list of eligible expenditure/savings does not include the principal payment.

The code also restricts the interest deduction only to in respect houses rented out and where such income is included in the income of the assessee.

At present, if a home buyer in the highest 30% tax slab were to avail the maximum tax exemption available on home loans then government loses over Rs 77,000 in tax.

The planned move to discontinue tax benefits for housing has faced widespread criticism and the finance ministry official said we are looking at provisions (in the direct taxes code) that concern common man directly, including tax incentives to housing.

Finance minister Pranab Mukherjee has already indicated his willingness to review the contentious provisions in the code, observing, I have laid a certain proposal in the form of a direct tax code. But it is not the Bhagwad Gita and it cannot be said that it cannot be changed. Mr Mukherjee has held discussions with senior officials of the apex direct tax body, the Central Board of Direct Taxes, on the changes to be carried out in the code to make it widely accepted.

The UPA government has lined up reform of both the indirect and direct tax structures that are laden with a plethora of exemptions. It plans to implement a comprehensive Goods and Services tax on the indirect taxes side and replace the decades-old income tax law with the new direct taxes code. India has a tax-to-GDP ratio of 11% at the central government level and about 16% including state and municipal taxes. This is well below the average 35.8% for OECD countries in 2007.

Tax reforms are aimed at increasing compliance and widening the tax base by lowering rates and removing exemptions. The government is hoping to redraft the new code quickly so that it can be placed in Parliament in the Budget session itself.