Invest Rs 40 lakh for tax benefit of Rs 20,000

The Budget proposal for additional home loan deduction will have little impact on the market

This year's budget has proposed an additional deduction of Rs 1 lakh for the interest repayable on home loans that fulfil specific criteria. This extra benefit is available for just one year and for eligible loans; the limit for deduction will revert to the normal limits after this year.

Will this benefit see some upsurge in property demand? Will home loan aspirants be motivated to buy property because of the additional tax benefit? Who will really benefit from this additional deduction, as it comes with its own set of ifs and buts?

Before answering these questions, there is a need to do an overview of the proposal, to assess the impact on the demand for residential property in the next financial year.

To begin with, the proposed deduction is available only if all the following conditions are met.

Deduction is available on the interest payable on a loan taken from a bank or housing finance company for acquiring a residential housing property, and the additional deduction will be Rs 1 lakh or the amount of interest payable for the year ending March 31, 2014, that is over the deduction limit allowed in the normal provisions, whichever is lower.

Also, the loan must be sanctioned during the financial year ending March 31, 2014, the sanctioned loan amount must not exceed Rs 25 lakh and value of the residential house property should not exceed Rs 40 lakh. You should also not own any other property as on the date of sanction.

Currently, the interest payable on a home loan taken to acquire a residential property is fully deductible if the property is given on rent. So, those who acquire ready property for renting out can, in any case, get full deduction for the interest payable. Hence, they will not benefit from this provision. Also, assuming an interest rate of around 10.25 per cent a year, if you take a loan of Rs 15 lakh for acquiring a ready to use residential property for own residence, it will be eligible for the deduction of the entire interest in that year and in future years as well. So, they will not benefit.

This additional deduction will certainly benefit people who buy ready property for self-occupation next year where the loan amount exceeds Rs 15 lakh (up to Rs 25 lakh) and the property value is less than Rs 40 lakh, since they will be eligible for an extra deduction over and above the limit of Rs 1.50 lakh. Even in cases where husband and wife (both earning) are jointly taking a loan, they will also have a double limit for deduction anyway and, hence, will not benefit.

But if the property remains under construction as on March 31, 2014, the interest payable for that year on a loan taken to acquire that property is not deductible under the normal provisions. Such borrowers should, in my opinion, be able to claim the deduction for interest under this section.

So, the extra benefit is likely to be restricted to single borrowers borrowing for ready to occupy residential property for self-use, costing between Rs 20 lakh to Rs 40 lakh or for any under construction property costing less than Rs 40 lakh.

Most borrowers are likely to have income of Rs 6-8 lakh a year, which means their tax rate will be 20 per cent. Hence, the maximum value of this one-time benefit is Rs 20,000 (20 per cent of the maximum deduction of Rs 1 lakh). This way, it translates into a small benefit of Rs 20,000 and a very limited number of borrowers. Hence, it is unlikely to have any significant impact on demand, even in cities where residential properties costing less than Rs 40 lakh are available.

The write is CEO, Apnapaisa.com