Additional benefit of Rs 1.5 lakhs on home loans: Can home buyers truly get the full benefit of Rs 3.5 lakhs?

The Union Budget 2019-20 has proposed an additional tax benefit of Rs 1.5 lakhs on home loans, in addition to the benefit of Rs 2 lakhs under Section 24(b). We examine whether the full benefit of Rs 3.5 lakhs can really be availed of, by a tax payer

In order to provide an impetus to the ‘Housing for All by 2022’ mission, the finance minister has proposed an additional tax benefit of Rs 1.5 lakhs, with respect to the home loan taken to buy an affordable house up to a value of Rs 45 lakhs, subject to the fulfilment of certain conditions. For self-occupied properties, this additional benefit is in addition to the existing benefit of Rs 2 lakhs available under Section 24(b), taking the overall tax benefit available for home loans to Rs 3.5 lakhs.


Maximum home loan eligibility

Lenders, while granting a home loan, require the home buyer to partially contribute towards the cost of the house that is to be acquired. In banking parlance, this is called as ‘margin money’. The balance, is the amount that a lender can advance to you, as a loan. The ratio between the amount of loan that a buyer can get and the value of the property, is called the ‘loan to value’ (LTV) ratio. Lenders insist on the margin money, to have a buffer available with them, in case the market price of the property reduces, in future. This ensures that the borrower always has his equity in the property purchased by him.

The new tax benefit on interest offered by the finance minister, is available if the home loan is taken from a bank. A few years ago, some banks were financing the full value of the house property, including the cost of stamp duty and registration charges. This exposes them to very high risk, in case property prices crash, thereby, creating a major risk of default. In order to avoid any event like the subprime crisis, in India, the RBI mandated the proportion of the property value, up to which the banks can lend as home loans. Presently, for a home loan of up to Rs 30 lakhs, banks are allowed to lend up to 90% of the value of the property. For home loans beyond Rs 30 lakhs, lenders can only extend home loans of up to 80% of the value of the property, generally.

See also: Budget 2019: Additional tax benefit of Rs 1.5 lakhs under Section 80 EEA explained

Home loan interest benefit available, versus actual projected interest outgo

As the maximum limit on the residential house to be purchased, to avail of the benefit under the newly proposed Section 80 EEA, is Rs 45 lakhs, the buyer of the house would only be able to get a home loan of up to 80% of the value of the property – i.e., Rs 36 lakhs. The rate of interest for a home loan of Rs 36 lakhs that is charged by the leading government bank, State Bank of India, is presently 9%. Assuming that the home loan tenure is 20 years, the EMI comes to Rs 32,390. For the first year, out of the total EMI of Rs 3,88,680, the principal repayment comes to Rs 67,416 and the interest component comes to Rs 3,21,264. The calculation is made on presumption that the principal amount is reduced monthly. So, against the maximum available tax benefit of Rs 3.5 lakhs, including the new benefit offered under Section 80 EEA, the tax payer will only be able to claim a benefit of Rs 3,21,264 in the very first year of the home loan.

From the above calculation, is becomes apparent that even if a person avails of the full home loan under the present circumstances, he will not be able to fully avail of the benefit that is proposed to be offered.

As the benefit is available for the entire tenure of the home loan and as the interest in the first year falls short of the benefit being made available, the claim of a benefit of Rs 3.5 lakhs being granted, is not fully true. As interest rates are expected to reduce gradually, home loans will be cheaper and thus, the interest outgo will reduce further. Moreover, as the outstanding principal amount reduces every year, the actual interest for this initial home loan of Rs 36 lakhs, will reach lower figures, year after year. So, theoretically, the additional benefit of Rs 1.5 lakhs looks great but in reality, the actual benefit that the home buyer will be able to claim, will be lower and even reduce year after year.

(The author is a tax and investment expert, with 35 years’ experience)


Budget 2019: What did the home buyers and home owners get

July 5, 2019: Although the Union Budget 2019-20 did not have much for the real estate sector on its own, we look at three main announcements that could affect home owners and home buyers

Additional tax deduction of Rs 1.5 lakhs on home loan interest

The first amendment affecting the home buyer, is a beneficial provision to allow them tax breaks, on the purchase of a residential house, subject to certain conditions. The finance minister has proposed to provide for an additional benefit for home buyers, in the form of interest on home loans, of Rs 1.5 lakhs. This is in addition to the benefit of interest available under section 24(b) up to Rs 2 lakhs, for self-occupied property.

The benefit is available, if the home loan is sanctioned between April 1, 2019 and March 31, 2020. The borrower should not own any house, on the date of sanction of the home loan. This benefit is available, only if the stamp duty value of the property does not exceed an amount of Rs 45 lakhs. This benefit can even be claimed with respect to interest paid during the construction period, which is not available under Section 24(b). As per the provisions in the finance bill, this benefit could also be claimed with respect to a let out property, although the finance minister, in her speech, referred to only self-occupied house properties.

 See also: Union Budget 2019: What did the real estate sector gain


Refinement of TDS provisions, for sale of a house to a resident

Presently, a buyer has to deduct tax at source, while purchasing any property from a resident, if the value of the property exceeds Rs 50 lakhs. However, while computing this value, the parties involved in the deal used to reduce the value, by ascribing costs to garage, electricity charges, maintenance charges, club membership fees, etc., in case the deal value was marginally higher. In order to bring clarity about the value that has to be taken, Section 194IA has been amended, to include all such charges while arriving at the threshold of Rs 50 lakhs. This will help reduce unnecessary litigation in the matter.

 Read the important highlights of Union Budget 2019 here.

Shifting of regulation of housing finance companies from the NHB to the RBI

When it comes to providing home finance, two categories of lenders are involved – banks and housing finance companies (HFCs). Both are regulated by different regulators. Banks are under the purview of the Reserve Bank of India (RBI), whereas HFCs are governed by the National Housing Bank. As they are different regulators, there is no uniformity in the lending policies of both the categories of lenders, in the home loan sphere. The finance minister had announced that the regulation rights of housing finance companies, will be transferred. This will ensure that the policies of both the categories are uniform, with respect to the methodology for computing the benchmark lending rate, as well as various charges like prepayment penalties. This will also ensure that the eligibility criteria, as well as margin requirement for home loans, are uniform. This will benefit and help the borrowers, as it will increase competition amongst the lenders.

 (The author is a tax and investment expert, with 35 years’ experience)


Additional inputs from PTI:

To widen the tax net, the government has proposed to introduce 5% TDS on all payments made by individuals to contractors or professionals, in excess of Rs 50 lakhs a year. Currently, there is no requirement for an individual or Hindu Undivided Family (HUF) to deduct tax at source, on payments made to a resident contractor or professional when it is for personal use, or if the individual or HUF is not subjected to audit for his business or profession. “It is proposed to insert a new provision, making it obligatory for such individual or HUF to deduct tax at source, at the rate of 5%, if the annual payment made to a contractor or professional exceeds Rs 50 lakhs,” said the Budget document. The budget also proposed to tax gifts, in the form of money or property situated in India, by residents to non-residents. Sitharaman proposed to tax such gifts from on or after July 5, 2019.


Budget 2018: Proposed income tax changes, for transfer of real estate

The Union Budget 2018-19 has proposed to rationalise the capital gains taxation, vis-à-vis the difference between apparent consideration and circle rates and also increase the holding period for capital gains bonds. We examine the impact of these measures

February 10, 2018: Home buyers and home loan borrowers were expecting a lot from Budget 2018 but they have been left disappointed by the finance minister, as nothing has been done on this. However, there is mixed news for people who sell any immovable property, vis-à-vis the sale consideration.


Changes proposed, rationalising the taxation of difference between apparent consideration and value computed as per circle rates, for stamp duty purposes

The taxation of profits on sale of immovable property, is taxable under the head profits and gains of business or profession, if you are a developer. Otherwise, the same are taxed as capital gains. Computation provisions under both the situations provide for situations, where the difference between the stated consideration, is lower than the value computed based on circle rates.

Section 43CA deals with the computation for developers and Section 50C deals with this situation where the immovable property is a capital asset. Both the provisions provide that where the value of apparent consideration is lower than the value as per circle rate adopted for the stamp duty payment, the difference between the value as declared in the agreement and the circle rate, becomes taxable in the hands of the seller. If it is a business asset, the same becomes taxable as business income and becomes taxable as capital gains.

The value as per the circle rate, is deemed to be the consideration for sale of the immovable property. So, even for a small difference between these two rates, the seller was required to pay tax on the higher consideration. In case the tax payer had to make investments under Section 54, 54F or 54 EC to claim exemption, the investments to be made have to be computed with reference to the circle rate. Therefore, the seller of the property has to invest the money which he has never received. Likewise, in such a case, even the buyer is not spared and the difference between the circle rate value and agreement value, becomes taxable in the hands of the buyer under Section 56(2) as a gift, in case the difference exceeds Rs 50,000.

See also: Budget 2018: Is there a hidden silver lining for the real estate sector?

In order to reduce the litigation and hardship to both, the seller and buyers, in case of minor difference between the circle rate and apparent consideration, the finance minister has proposed that the provisions of Section 43CA and 50C shall not be applicable, in case the difference between these two values does not exceed five per cent. Likewise, the buyer will also not be required to pay any tax under Section 56(2), if the difference does not exceed five per cent. Even in case the difference between both these values is higher than five per cent but does not exceed 50,000, the buyer will not be required to pay any tax on such difference.

The finance minister has also inserted a clarification in Section 54 EC, applicable for capital gains. There were disputes, whether one can claim the tax benefits for investments in bonds, simultaneously with investments in residential house. The finance minister has proposed to include land or building or both, as being eligible for exemption in respect of long-term capital gains, by investments in capital gains bonds.


Extension of holding period of capital gains bonds

Here is the negative news for sellers of immovable property. Presently, you can claim exemption of long-term capital gains up to Rs 50 lakhs, by investing the amount of capital gains in bonds of National Highways Authority of India, Rural Electrification Corporation and other bonds notified by the government under Section 54EC. Presently, the bonds have a tenure of three years.

The finance minister has proposed to increase the holding requirement of such bonds, from three years to five years. Since the tax of 20 per cent that is saved will be spread over five years instead of the present three years, these bonds will now not be attractive to the tax payers, as presently, the tax saved of 20 per cent for three years, works out to around seven per cent per annum. If we add 5.25 per cent interest being paid on such bonds presently, the effective return comes to 12.25 per cent. With the increased holding period requirement, the 20 per cent benefit will be four per cent per annum and 9.25 per cent with interest, after the amendment comes into force. The holding period requirement of five years will come into effect after April 1, 2018. So, tax payers who wish to claim exemption under Section 54 EC and whose six months period spills over beyond March 31, 2018, should make their investments by March 31, 2018, so as to avoid the lock-in period of five years.

(The author is a taxation and home finance expert, with 35 years’ experience)


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