The government may use Budget 2018 to make owning a house slightly more affordable and even rekindle the interest of home buyers. These measures could be in the form of tax sops for home owners and those looking to buy property.
Tax benefits help in bringing down the effective interest burden in properties that are financed through a home loan.
Here are few things that Budget 2018 could do to help taxpayers own a home and save tax simultaneously.
Principal repayment enhancement
In Budget 2018, the tax benefit on the principal amount repaid on a home loan for a self-occupied property may get an additional benefit of Rs 50,000 or more within the section 80C limit. While existing home loan takers can use the prepayment feature to benefit from it, new borrowers get an additional incentive to take home loans.
Interest payment enhancement
Currently, for a self-occupied property, in addition to the tax benefit on the principal amount, the interest paid is deductible up to Rs 2 lakh per annum. In the upcoming budget, we may see an increase in this limit.
Illustratively, on a Rs 40 lakh loan at 8.35 percent for 15 years, the interest paid in the first and second year is nearly Rs 3.28 lakh and Rs 2.90 lakh, respectively. Increasing the limit will help home buyers save more tax and could boost housing demand.
Currently, for an under-construction house, the interest pertaining to pre-construction period is allowed as deduction in five equal annual instalments, commencing from the year in which the house property is acquired or constructed. Thus, total deduction available to the taxpayer under section 24(b) on account of interest will be 1/5th of interest pertaining to pre-construction period + Interest pertaining to the post construction period.
For someone buying an under construction property for self-use, this limit may be a dampener. On Rs 40 lakh loan, the total interest paid over 5 years could be nearly Rs 7.5 lakh and it can be split in 5 equal instalments before taking tax benefit from the year of possession of the house. Even though the interest portion is high in the initial years of the loan and comes down later on, the annual instalment amount along with the interest paid for that year (post possession) could easily cross the Rs 2-lakh limit of section 24 especially on loans above Rs 25 lakh.
On a higher loan amount, such a limit is restrictive and a borrower may not get full tax benefit on the interest paid. Increasing this limit could help tax payers save more tax.
Loss from house property
For a house that is let-out on rent, Budget 2017 had changed the tax incidence for them. From FY 2017-18, the ‘loss from house property’ was restricted to Rs 2 lakh per annum for rented houses and ‘deemed to be let-out’ houses. There could be an increase in the Rs 2 lakh-limit announced in previous budget.
This move put a limit to the amount of interest a person pays on his home loan that can claimed as a set off (in case of ‘rented/deemed to be rented’ house). This, thereby, has effectively reduced the tax benefit an individual gets from interest paid on a home loan. However, the unadjusted loss from house property can be carried forward for eight assessment years but can only be set off against income from house property.
Real estate and GST
Real estate still does not come under the ambit of Goods and Services Tax (GST).. However, construction activities including residential structures will attract GST of 12 percent. This makes under-construction projects costlier than a ready-to-move-in home. As per the CBEC (Central Board of Excise and Customs), “Sale of building is an activity or consideration which is neither a supply of goods nor a supply of services.” This makes the ready-to-move-in properties lucrative compared with under-construction ones.
According to Surendra Hiranandani, CMD, House of Hiranandani, “In the GST regime, the input tax credit is available on taxes paid on materials bought for construction which can be adjusted against the GST liability, the effective tax rate post adjustment is quite high as compared to the old rate of 5.5 percent. Further, stamp duty continues to remain in force even after implementation of GST and the rates vary from state to state which increases the costs for the consumer. We hope that state governments abolish the same or merge with the existing GST rates.”
Section 80EE reintroduction
Home buyers who took loans in FY 2016-17 were allowed to take an additional tax benefit of up to Rs 50,000 under Section 80EE of the Income Tax Act, subject to certain conditions. The deduction is over and above the limit of Rs 2 lakh, provided it is for a self-occupied property. Although not available in the FY 2017-18, this benefit could be reintroduced in FY 2018-19, with modifications.
Here are the conditions that have to be met to avail the addition tax benefit:
o The additional deduction in respect to interest on loan taken would be applicable only for residential house property;
o It is available only for first-time home buyers;
o The maximum benefit is capped at Rs 50,000 a year;
o The value of the house property cannot exceed Rs 50 lakh;
o The loan amount cannot exceed Rs 35 lakh;
o The loan has to be sanctioned between April 1, 2016 and March 31, 2017.
Those who have already taken the loan, as per the conditions above, can continue to avail of the tax benefits in the later assessment years. If Budget 2018 reintroduces it for the FY 2018-19, home buyers stand to gain.