New deduction on affordable homes benefits loans with longer tenures

Joint owners would not be able to get the additional tax deduction due to caveats

 The move to provide additional tax deduction on affordable homes will benefit borrowers who opt for long-tenured loans. The newly-introduced provisions may not result in significant savings for loans that have a tenure of below 15 years. The reason: As the tenure of a loan reduces, so does the interest outgo, resulting in lesser savings. As the new tax deduction has a cap on the property price, those opting for a joint home loan will not get the benefit.

The recent Budget has increased the deduction a taxpayer can claim for interest paid on loans if they buy affordable homes. The government has introduced a new provision called Section 80EEA for it. It is in addition to Section 24 of the Income-Tax Act, which allows an individual to claim a tax deduction of up to Rs 2 lakh on the interest portion of a home loan. For affordable homes, there is now an additional deduction of Rs 1.5 lakh. Those buying an affordable house up to Rs 45 lakh can now get a total deduction of Rs 3.5 lakh on the interest portion of the home loan.

The new provisions, however, come with two more conditions besides the cap on the property price. It’s only for first-time buyers and available for loans taken between April 1, 2019, and March 31, 2020.

Attractive for those who already had plans: Most experts in real estate and banking feel that the sop makes sense for those who already have a plan to  purchase. “If a buyer was sitting on the fence, the benefit would nudge him to buy a house this financial year,” says Ratin Chaudhary, head of home loans, Paisabazaar.com.

Typically, in a home loan, the interest portion is over 80 per cent in the first year and tapers down gradually in the subsequent years. Due to the caveats, under no circumstances can a borrower make full use of the Rs 3.5 lakh deduction in a financial year. “Any additional savings put more money in the hands of the taxpayer. But it would have been useful to extend the benefit on properties of higher values. Borrowers could get to make full use of the additional deductions,” says Adhil Shetty, chief executive officer of BankBazaar.

Making sense of the Budget numbers: In her Budget speech, the finance minister said that the additional deduction would translate into a benefit of around Rs 7 lakh over a loan period of 15 years. The Rs 7 lakh benefit is the combined deduction available under Section 80EEA for the entire tenure of the loan where the property price is close to Rs 45 lakh. As the cost of the home reduces, the benefit would be lower. The actual tax an individual saves would depend on his tax slab and the other deduction he has availed under different sections such as 80C, 80D, 80CCD(1), and so on.

Joint borrowers don’t get the benefit: Those taking long-tenured loans will get the maximum benefit of the new deduction (See table). For a 20-year loan, the benefit can be availed for up to 12 years.  For those taking a 15-year, 10-year or 5-year loan, the deduction available is for eight years, five years and two years respectively.

If property buyers take a joint loan, it will be challenging to get the benefit of the new provision, especially if the co-borrowing is in equal proportion. According to the Income-Tax Act, joint borrowers can each get a deduction of up to Rs 2 lakh in a financial year or a combined deduction of Rs 4 lakh. The Reserve Bank of India allows banks to provide up to 80 per cent finance. On a Rs 45 lakh property, a borrower can get a home loan of up to Rs 36 lakh. If the interest rate is 8.9 per cent and loan tenure is 20 years, the yearly interest outgo does not cross Rs 4 lakh in any year.

Best use in case of under-construction property: According to the existing provisions of Section 24, a home buyer cannot claim interest deduction until the property is completed (received an occupation certificate). A borrower gets to claim deduction on the interest portion in five equal instalments after taking possession. Due to this, a borrower usually is unable to take the maximum benefit of the pre-construction phase. “The provisions of the newly-introduced Section 80EEA do not have any such restrictions. It means a borrower can claim interest deduction on loan for an under-construction property,” says Deepesh Raghaw, a SEBI-registered investment advisor.

Ground reality differs: While the government has been providing sops for affordable housing to buyers as well as developers, most of the projects don’t meet the criteria the government has laid down. Only a small number of developers have built housing that meets the government’s criteria for affordable housing in 2019. According to data from property consultancy ANAROCK, of the total housing supply of 1,39,490 units in the top seven cities in the first half (H1) of 2019, merely 39,840 units meet the government’s “affordable housing” criteria. “The recent Budget ‘bonanza’ of an additional tax deduction on interest repayment will benefit very few people in urban India,” says Anuj Puri, chairman, ANAROCK Property Consultants.