Home Truths. Budget provides shelter for housing

Budget 2016 provides a few measures to bring cheer to small taxpayers and first-time home buyers, in the form of additional deductions for some housing-related expenses. Let us examine each of these proposals.

In view of the government’s objective to incentivise affordable housing as part of the larger objective of “Housing for All”, the Finance Minister has proposed to provide an additional deduction of ₹50,000 under Section 80EE of the Income Tax Act, 1961 (Act), in respect of interest on housing loan taken by first-time home buyers. This is over and above the existing limit of ₹2,00,000 already available for interest on housing loan for self-occupied homes.

This deduction will be available only if the value of the house does not exceed ₹50 lakh and the loan does not exceed ₹35 lakh. Further, the home loan should be sanctioned between April 1, 2016 and March 31, 2017, and the benefit of additional deduction will be extended till the repayment of loan continues.

For example, Abhishek plans to buy his first house in Bengaluru in April 2016 for ₹42 lakh. The bank would sanction him a loan of ₹30 lakh during financial year (FY) 2016-17.

The interest on this housing loan which Abhishek would have to pay during FY 2016-17 would be ₹3 lakh. The total deduction that Abhishek would be able to claim as interest would be ₹2.5 lakh instead of the erstwhile limit of ₹2 lakh .

Another major concern for individuals with self-occupied house was the requirement of completion of construction/acquisition of the house property within three years, to be able to claim deduction of ₹2 lakh for interest paid on housing loan.

Considering that major housing projects take longer time periods for completion, the Finance Minister has proposed to enhance the time limit to five years. So, you will be eligible for deduction of interest of ₹2 lakh if construction/acquisition of the house is completed within five years.

The other proposed amendment which should bring cheer to individuals who do not own any residential property (nor do their spouse/minor child) and do not get house rent allowance (HRA) is the amendment in Section 80GG of the Act.

Considering the steep increase in rental charges and focusing on the taxpayers who do not receive HRA, the Finance Minister has raised the limit of deduction towards rent paid from ₹24,000 to ₹60,000 per annum. The taxpayer will have to furnish a declaration in Form 10BA that he/she satisfies all the conditions to claim the deduction under Section 80GG.

Let us take an example to understand this better. Heena earns an annual income of ₹5,00,000 and pays an annual rent of ₹1,20,000.

She does not receive HRA as a part of her salary and does not own any house. In such a case, the deduction that she will be allowed from her total income would be whichever is lower out of the following options: ₹60,000 per annum (increased limit); or rent paid in excess of 10 per cent of total income (₹1,20,000 – ₹50,000), that is, ₹70,000; or 25 per cent of total income (₹1,25,000).

The increase in the limit of deduction from ₹24,000 per annum to ₹60,000 per annum would help taxpayers in reducing their taxable income and consequentially their tax liability.

In case of a let-out property, the Finance Minister has also proposed a deduction of 30 per cent of the unrealised rent received by the taxpayer subsequently, to bring it on a par with taxation of rent arrears.

As housing is a considerable expense for most individual tax payers, the Finance Minister has well addressed the need for reform, for both home owners as well as those who live in rented accommodation. These proposals, if enacted, will bring relief to all such taxpayers. The above amendments would be effective from April 1, 2016, once the Finance Bill is passed in both Houses of Parliament and receive the President’s assent.

The writer is Tax Director - People Advisory Services, EY India. The views are personal