Budget should enhance home loan tax breaks

Samuel Johnson once said “Second marriages are the triumph of hope over experience”. February is normally that time of the year in India when tax-payers — especially the salaried class — have a feeling of hope that the Budget would provide some major tax-saving scheme leaving them with more cash on hand.

Over the last many years, their experience has left them disappointed. The feeling of hope is even higher this year, as this would be the last full-fledged Budget of this Government in its current tenure and, hence, it would resort to some tax munificence to appease voters.

In addition, we live in tough economic times, wherein a comfortable tax break would help off-set the general increase in inflation that the minimal increases in income expected now cannot cover.

Interest on housing loans

One of the mega deductions provided now is under Section 24 of the Income-Tax Act, wherein interest on borrowed capital is allowed as a deduction against any income from house property — either notional or real.

The present limit is Rs 150,000 per annum. Interest on borrowed capital is allowable as deduction on accrual basis — even if account books are kept on cash basis — if the capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.

For claiming interest, it is not necessary for the lender to have a charge on the property for the principal or the interest amount.

Courts have ruled that interest payable for outstanding interest is not deductible. Interest on borrowing can be claimed as deduction only by the person who has acquired or constructed the property with borrowed funds. It is not available to the successor to the property, unless he has also utilised borrowed funds for acquisition, and so on.

In effect, the relationship of borrower and lender must come into existence before it can be said that any amount or any other money is borrowed for the purpose of construction, acquisition, and so on, of house property by one person from another and there must be real transaction of borrowing and lending to amount to any borrowing.

Price swings

For interest during pre-construction period, interest paid/payable before the final completion of construction or acquisition of the property is aggregated and allowed for five successive financial years, starting with the year in which the acquisition or construction is completed.

This deduction is not allowed if the loan is utilised for repairs, renewal or reconstruction. If a taxpayer takes a fresh loan to pay back the earlier loan, the interest on the fresh loan would be deductible.

The present limit of Rs 150,000 has been in place since April 1, 1999 and has remained untouched in all subsequent budgets.

If one uses inflation as a benchmark, any inflation index in 2012 is almost double that 13 years back. Inflation rates in 1999 were below the 3 per cent-mark for a substantial period of time.

Interest rates have also increased from the 1999 days. Real-estate prices may have had their gyrations in this period of time but the 1999 prices are nowhere in sight. In effect, the person availing of a loan and aspiring to have a shelter in his own name is after 15 years paying more than what he would have in 1999.

If one assumes an average interest rate of 10 per cent for a housing loan, tax breaks can be availed of only for loans up to Rs 15 lakh, leaving the balance of the loan inefficient in terms of providing tax-breaks.

Tax breaks have not kept pace with the general price increase, which would appear to be a digression from the Government’s avowed policy of focusing on infrastructure and housing. It would not be unreasonable to expect that the amount of interest allowed for housing loans should be increased to Rs 250,000 per annum.

Other deductions

There also appears to be no reason to morph the principal paid towards a housing loan with the present Section 80C of the Income-Tax Act. Even though the limits under Section 80C too have not been increased substantially over a period of time, invariably, other investments exhaust the limit under Section 80C, leaving the principal unutilised for the purpose of a deduction.

A stand-alone deduction of Rs 50,000 for the principal should be permitted. An increase in the deduction per person by Rs 150,000 per annum would look gargantuan to any Finance Minister and would be shot-down as a no-brainer. The tax-payer would feel that it is time the Government plays catch-up of 12 years.

A practical approach could be to start with increasing the deduction with a target of Rs 300,000 in three years.

There could be a dip in tax revenues as a result of this but, then, many a Finance Minister in India has developed an expertise in evolving a jugaad solution for decreasing tax revenues by offsetting it in some other Section.

(The author is Director, Finance, Ellucian.)

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