There is some relief for home loan borrowers. In the revised code of Direct Taxes, the tax incentive on home loan interest payments has been retained. The Rs 1.5 lakhs deduction will continue to be available for home loan borrowers.
The revised paper on the Direct Tax Code (DTC) released this month has proposed to continue with the existing system of deducting interest payments (up to Rs 1.5 lakhs) from the total income before calculating tax liability.
The earlier discussion paper released in August 2009 had proposed to do away with all the exemptions, including the tax benefit on interest payment on a home loan. This, if implemented, would have made cost of borrowing higher. However, the department had also increased the exemption limit to Rs 3 lakhs from the present level of Rs 1.1 lakhs against investments in select instruments such as PPF, pension funds and life insurance schemes. The Rs 1.5 lakhs benefit against home loan interest payments will be included under the Rs 3 lakhs ceiling.
In the DTC, the government had earlier argued that as the exemption limit against investments has been increased, taxpayers will not be affected if the benefit on interest payments on home loans is withdrawn. However, it is felt even if the interest payments on a home loan is not treated as a separate category and will be a part of the exemption limit of Rs 3 lakhs, taxpayers will benefit. As many middle income taxpayers will find it difficult to exhaust the Rs 3 lakhs ceiling, inclusion of interest payments of up to Rs 1.5 lakhs in the total exemption limit will be beneficial.
According to analysts, the government should continue with the deductions against interest payments on home loan as a separate category, considering the contribution of the housing sector to the gross domestic product (GDP). The housing sector, with its critical linkage to many other manufacturing and services sectors, is of crucial importance. With the growing demand for homes, expanded purchase base and increased supply, and increasing home loan rates, there is a need to at least retain the tax incentives. Tax incentives play a key role in motivating prospective homebuyers to invest in property.
Acceding to the demand, the government decided to get back to the earlier system.
Tax breaks on home loan interest
Tax benefits are available to income tax assessees who have taken a loan to either buy or build a house.
Deduction on interest paid
If these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs:
Loan is borrowed on or after April 1, 1999 to acquire or construct a house The acquisition or construction should be completed within three years from the end of the financial year in which the loan was borrowed The bank, extending the loan, certifies that the interest claimed is payable on the amount advanced for acquisition or construction of the house, or as refinance towards the principle amount outstanding under an earlier loan taken for such an acquisition or construction
If these conditions are not met, the interest amount is deductible up to Rs 30,000 only.
To claim a deduction of Rs 30,000, these conditions have to be met:
Loan is borrowed before April 1, 1999 to purchase, construct, reconstruct, repair or renew a house The loan is borrowed on or after April 1, 1999, but the construction is not completed within three years from the end of the year, in which the loan is borrowed.
