Coming after the year of a pandemic which hurt the global economy, this Union Budget should aim to put more money in the hands of the common man. Among the many ways to achieve this would be through enhancing existing tax deductions and introducing new ones. It would also be useful to enhance those deductions which stimulate interest in priority sectors such as real estate. Therefore, I’d like to make the following recommendation to the Finance Minister: remove home loan deductions from Section 80C, introduce a new section just for home loan deductions, and set the deduction limit to Rs. 5 lakh without sub-limits on principal and interest. Here are my justifications for this recommendation.
Streamlining Of Home Loan Deductions Required
Currently, eligible taxpayers can claim deductions under Sections 80C (for principal paid, up to Rs. 1.5 lakh), 24B (for interest paid up to Rs. 2 lakh), 80EE (for interest paid up to Rs. 50,000) and 80EEA (for interest paid up to Rs. 1.5 lakh). Apart from this, eligible home buyers can also claim a home loan interest subsidy under PMAY of up to Rs. 2.67 lakh. There is a need to streamline these various benefits under a single head.
Enhanced Limit Needed
Home-buying costs in India are astronomical. Families are often required to spend their life savings and borrow several multiples of their annual incomes to fulfil their dream of home ownership. The costs can’t be escaped, and a large part of the costs is interest on home loans. Often, the long-term interest on home loans exceeds the cost of the property itself. Therefore, it’s only fair that home loan deductions be in line with the costs. Currently, a new home buyer eligible for deductions under 80EEA can theoretically claim a deduction of up to Rs. 5 lakh. Therefore, the recommendation is that home loan deductions be enhanced to Rs. 5 lakh for all borrowers so that they get better value through tax deductions against the high costs of borrowing.
Current Deductions Discriminatory
Because of the high costs of home-buying, many buyers have to compromise on their first home purchase. Deductions under 80EE and 80EEA, and the PMAY subsidy is available only to first-time buyers. Therefore, they discriminate against second-time buyers who have to upgrade – often out of necessity for larger living spaces. Therefore, they must go through the cost-intensive process of buying a second home, and due to a stagnant real estate market, they’re not likely to get great returns from selling their first home as well. Given these constraints, it would be advisable to relax the tax deductions norms.
80C Is Too Crowded
The other problem with 80C is that it’s become crowded with too many tax-saving options, and therefore fails to provide full value for the many expenses that some taxpayers cannot avoid. For example, someone with a home loan, school-going kids, PF contributions, and life insurance premiums will easily exceed the Rs. 1.5 lakh limit and therefore fail to get full value on tax deductions on these items. Therefore, at the very least, home loan principal payments need to be removed to their own new section in the Income Tax Act.
This Will Stimulate Discretionary Spending & Real Estate
Enhanced deductions for home loan payments without the sub-limits would increase disposable income, which would boost discretionary spending, which would stimulate the economy after a very tough year. The availability of better tax deductions which don’t discriminate against second-time buyers, would also stimulate interest in the real estate market.
We know from past experience that real estate growth has a multiplier effect on the economy through the creation of construction jobs.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.