The real estate sector has been struggling for quite some time though the government has been doing its bit, to revive the sector. The government has reduced GST rates and has attempted to rationalise the GST rates on residential units. For the affordable housing segment, the government has reduced the GST rates to as low as 1% and for non-affordable housing, the GST rates have been brought down to 5% from the earlier rate of 12%. The government has also expanded the scope of the benefit of tax exemption available to the developers, with respect to projects in the affordable housing segment. Nevertheless, there is scope for more measures, especially for individual tax payers.
Introduction of a separate deduction for repayment of housing loans
Presently, under Section 80 C of the Income Tax Act, individuals and HUFs are allowed to claim a deduction of up to Rs 1.50 lakhs for various items, including repayment of home loan taken for a residential house from specified institutions. Due to various items clubbed together in Section 80 C, like Employee Provident Fund, NPS, life insurance premium, school fee for children, NSC, PPF, etc., in many of the cases the meagre limit of Section 80 C gets exhausted before any amount with respect to the home loan repayment can be claimed. With prices of houses increasing and the huge amount of EMIs to be serviced, it is logical and rational that the government carve out the deduction for home loan repayment from Section 80 C and introduce it as a separate section, to allow exclusive deduction for home loan repayment. This will certainly boost the real estate sector and incentivise home buyers, especially the millennials, to buy residential houses and avail of the exclusive tax benefits.
Rationalising the tax slabs and rebate under Section 87A
Presently, under Section 87A, an individual tax payer is entitled to a rebate of up to Rs 12,500, in case the total income is below Rs 5 lakhs. Once this threshold limit is crossed, the tax payer loses this rebate of Rs 12,500 fully, even in cases where the taxable income exceeds the threshold by just a few hundred rupees. This steep rise in tax liability by Rs 12,500, once the income crosses this limit of Rs 5 lakhs, induces many a tax payers to manipulate and keep the income below Rs 5 lakhs, to avail of this benefit, especially the self-employed ones, who have the scope to manipulate the taxable income. Since the banks and housing finance companies lend on the basis of income of the applicant, such tax payers are not able to get home loans of the amount that they otherwise would have been eligible for, had they disclosed their real income.
In order to discourage such manipulation, the government can introduce the provision of granting marginal relief in such cases, so as to provide that the increased tax liability shall not exceed the amount by which the taxable income exceeds the threshold limit of Rs 5 lakhs. For example, if the taxable income of a person is Rs 5.05 lakhs, his tax liability presently comes to Rs 13,500, which exceeds the amount of Rs 5,000 (the amount by which the taxable income exceeds the threshold limit of Rs 5 lakhs). If the government introduces the benefit of marginal relief in such marginal cases, the tax liability in this case will not exceed the incremental income of Rs 5,000. Such relief would incentivise the individual tax payers to offer full income for tax, in case the marginal income exceeds the threshold income by a few thousands only.
Individual tax slabs
Presently there are three tax slabs for individuals. After the basic exemption of Rs 2.50 lakhs, the tax rate is 5% up to Rs 5 lakhs for individual tax payers who have not completed 60 years and for all HUFs. After this initial tax slab of 5%, the slab rises steeply to 20%, for those having income between Rs 5 lakhs and Rs 10 lakhs. This psychologically induces the tax payers to manipulate their incomes, so as to avoid the shock of a steep increase in the tax liability, relative to taxable income. The next slab of 30% is applicable for income above Rs 10 lakhs. This maximum rate of tax for such a low threshold limit, ignores the cardinal principle of ‘taxing people accordingly to their ability to pay’.
As the government needs to get the data through filing of ITRs, it may not tweak the basic exemption limit. However, in order to make the tax slabs rational, to discourage individual tax payers from manipulating their taxable income and to make the tax slab structure rational on the basis of ability to pay, the government could:
- Retain the basic exemption of up to Rs 2.50 lakhs.
- Retain the 5% slab rate for income from Rs 2.50 lakhs to Rs 5 lakhs.
- Introduce a new tax slab of 10% for income between Rs 5 lakhs and Rs 10 lakhs.
- Fix the tax rate at 20% for the income slab between Rs 10 lakhs and Rs 25 lakhs.
- For income between Rs 25 lakhs and Rs 1 crore, fix a slab rate of 30%.
- For income beyond Rs 1 crore, fix the tax slab at 40%, without any surcharge.
After the reduction in the tax rates for companies, the highest rate applicable for individuals in higher tax brackets is higher than that for companies. It is high time the individual tax payers are also treated fairly and tax rates reduced. The rationalised rates will ensure better tax compliance and collection, as propounded by economist Arthur Laffer, who showed that lower tax rates result in overall higher tax collection. With higher declared income, individuals will be able to get higher home loans. Moreover, the tax slabs suggested above will leave more money in the hands of tax payers, to service the home loan EMIs. These measures will help create demand for affordable housing and help the government its Housing for All by 2020 mission.
(The author is a tax and investment expert, with 35 years’ experience)
Update on July 5, 2019: Finance minister Nirmala Sitharaman, while presenting the Union Budget 2019-20, on July 5, 2019, said the government is proposing additional tax deduction of Rs 1.50 lakhs on the interest paid on home loans taken up to March 31, 2020.
In terms of corporate taxes, Sitharaman also proposed that 25% corporate tax will apply on companies with up to Rs 400 crores turnover and this would cover 99.3 pc of corporate India. The government aims to simplify tax administration and bring transparency, she added.
(With inputs from PTI)
Budget 2019: What do home buyers need from the finance minister?
July 4, 2019: We look at some suggestions, on what India’s first full-time woman finance minister can do, for home buyers, in the upcoming Budget 2019
Introducing a separate limit for home loan principal repayment
Presently, a deduction of Rs 1.50 lakhs is allowed, for repayment of the principal amount of home loans, under Section 80 C. Since Section 80 C was introduced in 2003, with an initial limit of Rs 1 lakh, it has only been revised once in 2014, to Rs 1.50 lakhs. This revised limit is not sufficient, to keep pace with inflation during the period. The almost stagnant limit, accompanied with the introduction of various items like deposits under the Senior Citizen Scheme, five-year tax-saving fixed deposits, national pension system, Sukanya Samriddhi Scheme, etc., makes this space crowded.
Moreover, with the ever increasing prices of real estate, the amount needed to finance a residential unit has skyrocketed over the years.
Due to the many items covered under Section 80 C, the limit of Rs 1.50 lakhs gets exhausted easily, with just a few items like life insurance premium, provident fund/ public provident fund contributions, tuition fees for school children, etc. These items generally crowd out the principal repayment of home loan for most of the tax payers, especially those who are salaried. So, considering all the above reasons, the finance minister should introduce a separate limit for home loan repayment through a separate section, by carving it out from Section 80 C.
Removing the limit of Rs 2 lakhs, for deduction with respect to interest paid
The government wants everyone to have a house by 2022 but there are certain provisions in the income tax laws, which come in the way of achieving this objective. A person who has borrowed money, for the purchase or construction of a house for self-occupancy, is entitled to claim a deduction for interest paid up to Rs 2 lakhs, whereas, there is no such limit if the house property is let-out. The excess amount of interest, if any, paid on money borrowed for self-occupied property, gets lost.
Logically, the law should be the other way round. If the government wants people to own houses, it should provide tax benefits for full interest paid, if the house is to be used for self-occupancy and the restriction, if any, should be applicable on people who wish to do tax arbitrage by buying a house and letting it out. Hence, the finance minister should remove the cap of Rs 2 lakhs on interest for self-occupied houses.
The interim budget 2019 recognised the practical need of a person to have two houses for self-occupancy for various reasons and introduced a law, allowing a tax payer to have two self-owned houses as self-occupied. However, the amount of interest that can be claimed for both the houses together, has been retained at Rs 2 lakhs. If it is not possible to remove this limit altogether, the finance minister should allow a limit of Rs 2 lakhs on interest, for each of the self-owned and self-occupied houses.
Increase in the limit of loss to be set off against income
Prior to 2018, there was no restriction on the amount of loss under house property, which could be set off against other income of the year. However, the budget of 2018 introduced a limit of Rs 2 lakhs, beyond which loss computed under the head of house property, cannot be set off against other income. Looking at the amount of loan and interest that one has to pay, this amount is insufficient. This limit of loss that can be set off against other income, should be raised to Rs 5 lakhs, to give relief to the small tax payers in urban areas.
Carry forward of unabsorbed losses, under the head income from house property
Housing for All by 2022 is the ambitious mission of the government and it has introduced various fiscal incentives for first-time home buyers in various categories, by way of cash subsidies, etc., but there are some hindrances, as well. Presently, any loss beyond the limit of Rs 2 lakhs under the head ‘income from house property’, is not allowed to be set off against other income and thus has to be carried forward. This loss beyond Rs 2 lakhs, is allowed to be carried forward for eight subsequent years, to be set off against income under the house property head only. Since a home loan is a long-term product, where the general tenure is 20 years, there is no probability of the tax payer having any positive income under the head ‘Income from house property’ unless the tax payer prepays the home loan during the initial years.
As the probability of the tax payer having a positive income under this head is almost negligible during the initial nine years of the home loan and if the government really wishes to promote Housing for All, it should remove the restriction of eight years for carry forward of losses under the house property head and allow this loss to be carried forward and set off, till it gets fully set off, so as to let the tax payer have the benefit.
Rationalisation of GST rates for under-construction houses
The average home buyer is not tax-savvy and may not understand the intricacies of the tax laws. The recent decision of the GST Council, to reduce the GST rates for various categories of houses, accompanied with an option to the developer, to migrate or not migrate to the reduced rates regime for pending projects, has caused confusion in the minds of home buyers.
The reduction in GST rates for under-construction properties, has been coupled with a removal of the input credit, for the GST paid on the inputs used for the construction of the property. Although the move was intended to give relief to the home buyers, the results have been to the contrary. While developers have been collecting reduced GST rates, they have increased the base price of the property. This has resulted into higher cost to the home buyers, as the developers are not able to utilise the input credit which arises at higher rates of GST on such inputs, against the liability of lower GST rates on sale of such under-construction properties. This is happening, because the costing of the developer is not transparent.
Decisions pertaining to GST rates are taken by the GST Council, headed by the finance minister and hence, are outside the purview of the union budget presentation. Nevertheless, the GST Council needs to critically examine the real impact of the reduced rates regime without the input credit for developers, if it really wants to provide relief to the home buyers.
This should be done with collection of data across the country about the rates of properties booked, before and after the implementation of the proposal to reduce the GST rates.
(The author is a tax and investment expert with 35 years’ experience)