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Tax concessions on interest paid
July, 02nd 2010

Tax concessions on interest paid on home loan to benefit buyers

There is good news for house buyers. In its revised discussion paper on direct tax code, the government has given a number of sops to the house buyers as against what was proposed in original draft released in August 2009.

The revised draft has again proposed to allow tax concessions on the interest paid up to Rs 1,50,000 during a financial year on home loan to buy a house for one's own use.

This provision was conspicuous by its absence in the original draft discussion paper. Similarly, the government had also decided not to tax the rental income from a house property on presumptive basis, which was part of the original draft. This will also provide a lot of relief to the homebuyers.

The direct tax code will be the basis on which the government is planning to formulate new tax laws, which in turn will replace the existing tax system. The new legislation is likely to be introduced in the coming session of Parliament.

Benefits on home loan

The revised discussion paper on direct tax code said that a house, which has not been let out, the individual house owner will be eligible for deduction on account of interest on capital borrowed for acquisition or construction of such house property subject to a ceiling of Rs 1.5 lakh from the gross total income for calculation of the tax.

However, it may constitute the part of overall tax exemptions limit of Rs 3 lakh as proposed in the discussion paper against the investments made in certain instruments like provident funds, PPFs and life insurance schemes.

The tax benefits on the interest payment on home loan taken to buy a house for one's own use is a popular scheme introduced by the government in 2002. This, reduces the cost of borrowing to buy a house by up to 3-4 percentage points.

That means, if the home loan is available at 9%, the effective rate for a borrower because of the tax benefit on the home loan comes down to around 5%.

Benefits on home loan

In order to do away with all exemptions for making tax laws simpler, government proposed to remove even the tax benefits on interest payment on the home loan.

However, the department had also increased the exemption limit to Rs 3 lakh from the present level of Rs 1.10 lakh against the investments in select instruments like public provident fund, pension fund and life insurance scheme.

In the DTC, the government had argued that as the exemption limit against the investments has been increased, the taxpayers will not be affected if the tax benefits on interest payment on home loan is withdrawn.

As the scheme is very popular, its withdrawal attracted a lot of criticism. And the government finally decided to revert back. But, in the discussion paper, it said, "The overall limit of deduction for savings will be calibrated accordingly."

Benefits on home loan

As the original discussion paper on DTC proposed to discontinue the tax benefit on the payment of interest on home loan, which means even if one has not exhausted the Rs 3 lakh investment limit for the exemption of tax benefit, he would have to pay the tax on the interest payment on home loan.

In most of the middle-class income group, after making an interest payment of Rs 1.50 lakh, it is difficult to exhaust the exemption limit of Rs 3 lakh. Therefore, if interest payment of Rs 1.50 lakh is included in the exemption limit, it will benefit a number of middle class income group people.

But seeing the need for house and the contribution of the housing sector in the GDP, experts feel that the government should have continued with the deduction against the payment of interest on home loan as a separate category and not included in the overall exemption limit.

Calculate rental income

According to the revised discussion paper, gross rent will be the amount of rent received or receivable for the financial year in case of house property let out and will not be computed based upon the presumptive rate of tax on the value or cost of construction or acquisition.

At the same time, the revised discussion paper also proposed that if the house property is not let out, the gross rent will be taken as nil and accordingly no deductions shall be allowed for taxes or interest paid, if the house is bought as an investment asset and not for the self use.

The original draft discussion paper on DTC had proposed that for the purpose of the computing "Income from House Property" , the gross rent in respect of a property shall be the higher amount of contractual rent and the presumptive rent.

The presumptive rent shall be 6 % of the rateable value fixed by any local authority in respect of the property; or the cost of construction or acquisition of the property , if no such value has been fixed, said Pranay Bhatia, Associate Partner, Economic Laws Practice (ELP).

The scope of income from house property is proposed to be extended to all properties, a report by ELP said. These provisions would have increased the tax liabilities of investors.

Take for example , if the capital value of a house is Rs 1 crore, and it fetches you a rent of Rs 20,000 per month or Rs 2.40 lakh per annum, your income from house property would have been treated as 6% of Rs one crore, which is Rs 6 lakh. So if you fall in 30% tax bracket, the tax element would have been Rs 1.80 lakh.

The paper noted that the most opposed element has been the income from house property that was proposed to be determined as notional rent on presumptive basis (at the rate of 6%) with reference to the cost of construction or acquisition.

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