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Home loans: It’s the best time to buy a budget home

Adhil Shetty

In the Union Budget, the finance minister proposed to extend additional new tax benefits on home loans for one more year. While credit-linked subsidies for middle-income groups weren't extended this time, the recent announcements from the Reserve Bank of India have assured us that interest rates would remain subdued for now. If you are in the market for your first residential property purchase, here are a few reasons why you should consider owning budget homes.
Extension of tax benefits

Budget homes are eligible for additional tax benefits. Ordinarily, a home loan offers tax deductions up to Rs 1.5 lakh under Section 80C for principal paid and up to Rs 2 lakh under Section 24B for interest paid. But in the 2019 Budget, a new deduction was announced and subsequently extended up to March 31, 2021, in the 2020 budget. Eligible homeowners can deduct a further Rs 1.5 lakh for interest paid under a new Section 80EEA.

It thus becomes possible for those homeowners to deduct up to Rs  5 lakh from their home loans alone. A person in the 30% slab can thus save up to Rs 1.53 lakh. The eligibility criteria are as follows: you must be an individual purchasing your first home; its stamp duty value cannot exceed Rs 45 lakh; the loan should be taken in either FY 19-20 or 20-21; and the carpet area cannot exceed 645 sq. ft in metros and 968 sq. ft elsewhere.

Interest rates favour small loans

Your home loans are cheaper if your loans are small. With most banks and home financing companies, the interest charged on home loans increases with the quantum of the loan. For example, with a large government bank, the lowest rate of 7.90% is reserved for loans under `30 lakh taken by women. The rate increases to 8.15% onwards for loans between Rs 30 lakh and Rs 75 lakh, and 8.25% onwards for loans above Rs  75 lakh. As such, lending rates are at a decadal low. They are expected to remain customer-friendly because banks have linked the interest rates on new retail loans to the repo rate. This assures better transmission of rate cuts from the RBI to customers.

Circle rate discount increased

Sometimes, the commercial rate of the property you are buying may be different from the circle rate applicable. In the past, if the difference was greater than 5%, the difference would be treated as income in both the seller and the buyer's hands and taxed as per the norms. But in this Budget, the FM also proposed to increase the difference limit to 10%. This would reduce the tax burden on real estate transactions, thus providing another incentive for buyers to make the most of the prevalent conditions.

Besides, many developers across the country constructed affordable properties to be in line with the government's "Housing For All By 2022" vision. However, due to the recent credit crunch, there was a major slump in demand which resulted in mounting inventories that the developers are keen to clear quickly. All this makes the affordable housing sector a buyer's market where the aspiring homeowners will have more room to negotiate with the developers for the best deals.

That being said, a budget home is easier to finance; it's also easier to make a down payment on, and a smaller loan also allows you to get out of debt faster as your income rises. The best interest rates are reserved for small loans as are the highest tax deductions. Therefore first-time homebuyers can consider buying a starter home now. They can always upgrade to bigger homes in the future.

(The writer is CEO, BankBazaar.com)