It is commonly said that the three factors to consider when buying real estate are location, location and location. But even before you get there, the one key requirement that compels you to think of buying is sentiment. We have been mired by an overdose of negative sentiment and home-buyers have firmly settled down on the fence.

Budgets have been typically good to home buyers, and in 2020, there is strong expectation that the Finance Minister will deliver an encore to boost enthusiasm.

Tax benefits

The simplest and the most popular hope is on increased tax benefits for home-owners. We can further break this down into a few specific items. For example, the tax deduction limit for home loan interest for self-occupied homes, under Section 24, is currently capped at ₹2 lakh. In the Union Budget 2019, an additional deduction of ₹1.5 lakh on the interest paid was introduced under Section 80EEA. You can avail ₹3.5 lakh, if certain conditions such as purchase price limit (less than ₹45 lakh), loan sanction period (April 1, 2019 to March 31, 2020) and a few others are met.

There is expectation that the benefit will be extended beyond March 2020 to stimulate home purchases. Buyers also hope that the home price limit is further increased, to extend the benefits to more buyers in metro cities. This is a simple request that directly gives the benefit to a home buyer.

Allied to this are the complications that many buyers face when they purchase under-construction property. For one, even though you may be paying EMI for the loan taken, you cannot claim any deduction if the construction has not been completed. You must aggregate the interest payments and and then claim tax deduction in equal instalments over five financial years, after the construction is completed. To add to this, many projects were stuck and took many years to complete, denying home-buyers tax benefits during the period. Not just that, if the construction period exceeds five years, you can only claim deductions of ₹30,000 annually.

Home-buyers are not in control of construction being completed and thus turn victims. Penalising them again by denying their tax benefit is quite unfair. So, there is expectation that we may see changes on the tax deduction part, giving relief to those who bought into projects that are stuck.

Home loan relief

Another expectation is to feel the real benefits of a lower rate of interest on home loans. While tax benefits on home loan interest payments indirectly serve to reduce the effective interest paid, it is also important to ensure that the repo rate reductions are passed on to home-buyers.

Sample this. The RBI cut interest rates by 135 bps during the year, but this reduction has not been effectively transmitted to retail borrowers. For instance, SBI’s home loan interest rate was about 8.65 per cent in January 2019 and has dropped to 7.95 per cent in January 2020 – lower by only 70 bps. In general, rate-cuts are not transmitted fully and data from the RBI show that the weighted average lending rate reduced by only 44 bps in 2019.

Lower home loan interest rates would bring joy to buyers and investors for a few reasons. One, a lower monthly payment would bring home buying within the reach of many. Two, it will increase the price range of choices for buyers and help them choose from a wider pool of completed homes. Three, it will lower the wide gap between rent payments (about 2-3 per cent of the property price) and interest payment (about 8 per cent of home price) and tip the balance slightly more towards ownership.

Tenancy focus

While home ownership is one part of the property market, rental is also a sizeable segment. It is not uncommon to buy a home as an investment and give it on rent. This segment has however, been tepid, and some incentives are being sought. For instance, when a home is given on rent, the interest paid on home loans, under Section 24, are not capped at ₹2 lakh and the entire interest can be deducted. Landlords also get a standard deduction of 30 per cent of the rental income, irrespective of maintenance and other expenses. However, the entire loss (rent income minus all the expenses and deductions) is capped at ₹2 lakh per year and can be carried forward for eight years. Given the low rental yield and the high interest payment in the early years, this dis-incentivises investors. Raising this limit upwards will spur second home purchases.

Also, due to various legal issues, owners are not keen to rent out properties. There are nearly 1.10 crore urban vacant housing units, according to a 2019 report by Knight Frank India. The Draft Model Tenancy Act, 2019 is a step to create a robust structure for regulating landlord-tenant relationships and settling disputes. Tenants and home-owners hope that rental housing is seen as a need and incentives are put in place in the Budget to promote this.

Double whammy

If construction does not complete in five years, tax deduction on interest is reduced to ₹30,000 annually

Budget asks

Higher deductions

Lower loan interest

Favourable rental policy

(The author is an independent financial consultant)

Related Topics
comment COMMENT NOW