 "Budget 2025: Why scrapping home loan tax benefits could hurt the common man")
Finance Minister Nirmala Sitaraman is expected to introduce a bill for a new direct tax law in the forthcoming budget session. The law is set to replace the six-plus-decade-old Income Tax Act of 1961, currently consisting of 298 sections and 23 chapters. The new law is expected to simplify the provisions, purge redundant ones, and make the language more layman-friendly. Further, the government of India has indicated that the draft law will be released for public comments, which can then be tweaked based on feedback from taxpayers and experts.
Old tax regime to be eliminated?
There is widespread speculation that the old tax regime will be discarded altogether. In our view, there is sound logic behind the same. The accompanying exhibit is instructive. Our calculations show that the old tax regime with only 80C and 80D benefits (red line) is always inferior to the new regime without deductions (blue line).
When the new tax regime was introduced in 2020, taxpayers could save much more money by claiming home loan interest deductions u/s 24 in the old regime. However, the FY25 Budget’s tweaking of slabs in the new regime has nearly eliminated such advantages of the old regime over the new (compare the blue line with the black line). As the yellow bar graphs show, only those earning between Rs 7 lakh and Rs 14 lakh can be better off in the old regime by claiming the home loan interest deduction u/s 24, with the maximum benefit of Rs 33,800 at an income of Rs 9 lakh. After that, the relative benefit, compared to the new regime, dwindles and becomes negative once the income exceeds Rs 15 lakh.
Scrutiny required for the policy shift
Thus, it doesn’t matter much if the old regime is scrapped. However, with it, the benefit of claiming deductions against the payment of home loan interest will also stop. The question is, how desirable will that be from a policy perspective? In particular, the socio-economic implications of such a step for India’s real estate sector – currently valued at $493 billion and contributing 7.3 per cent to GDP – deserve careful scrutiny.
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First, the timing of this policy shift may be particularly concerning for the middle class, especially those earning between Rs 7-15 lakhs, who typically fall outside the Pradhan Mantri Awas Yojana - Urban (PMAY-U) coverage. Recent data from Knight Frank Research shows that 79 per cent of home buyers rely on home loans. Besides competitive interest rates and flexible loan options, most buyers consider potential tax benefits in their purchase decisions. Removing the interest deductions benefits altogether could significantly impact this demographic’s homebuying capacity and decisions, also adversely impacting the government of India’s plan for affordable housing for everyone. The sector requires over 25 million affordable housing units by 2030 to meet urban housing demands – a target that could become increasingly challenging without tax incentives driving middle-class homeownership, particularly in the current scenario of rising property prices and high interest rates.
Second, the real estate sector is witnessing a crucial transformation in buyer preferences and market dynamics. Indeed, as ANAROCK data reveals, there has been a dramatic decline in affordable housing’s market share, falling from 38 per cent in 2019 to just 18 per cent in 2024. This segment’s share in total housing supply across the top seven cities has similarly contracted from 40 per cent to 16 per cent. Removing tax incentives could further accelerate this decline, potentially creating a vacuum in the middle segment too, where 30-37 per cent of total sales consistently occur. Besides, developers may shift focus to higher-margin luxury projects, further widening the affordability gap and undermining inclusive growth.
Third, the implications for employment and economic growth are substantial. The real estate sector is the largest employment generator after agriculture, accounting for 18 per cent of national employment. The sector is projected to reach $5.8 trillion by 2047, contributing 15.5 per cent to India’s GDP.
Any policy change that dampens housing demand could have adverse multiplier effects across the economy, particularly affecting the 36% of manufacturing sector demand that drives warehousing and construction activities. From a labour market perspective, this may be concerning too, given that the construction sector creates substantial unskilled and semi-skilled employment opportunities for seasonal agricultural workers, providing crucial supplementary income for rural households.
Fourth, the timing is particularly critical for the banking sector, given the current market dynamics. Housing loans surged from Rs 6.3 trillion in 2015 to Rs 28.3 trillion by August 2024, indicating robust household interest in property investment. Removing tax benefits could disrupt this growth trajectory and affect the broader financial sector’s stability.
Thus, we suggest that while the new bill comes with simplifications and fewer provisions for deductions to facilitate faceless scrutiny of filed returns and reduce opportunities for perpetrated fraud, there should be a provision for claiming some deductions based on interest payment against home loans. This would align with basic taxation principles, as companies can also deduct loan interest from their earnings before tax. Moreover, it would help maintain the disposable income of households, especially the emerging middle class, and prevent the Indian economy from falling into a low-consumption trap.
Sayantan Kundu is an assistant professor (finance) at the International Management Institute (IMI) Kolkata, and Amarendu Nandy is an assistant professor (economics) at the Indian Institute of Management (IIM) Ranchi.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper