Budget 2019: Deductions for housing; here are conditions to avail these benefits

Union Budget 2019 India: Benefits for housing has been one of the key areas of focus for the government and there has been heightened expectations from the common man since the current limit of deduction for housing loan interest at Rs. 200,000 per annum is grossly inadequate. Keeping in mind the objectives of ‘housing for all’ and to ensure affordable housing, Budget 2019 has provided an additional deduction of Rs. 150,000 for purchase of property. While this is a welcome measure, it is important to understand the conditions that are attached to avail this.

The following are the conditions attached to avail the additional deduction:

• The benefit will be available for loans sanctioned by any financial institution during the period 1 April 2019 to 31 March 2020 for the acquisition of house property.
• The stamp duty value of such property should not exceed INR 45 Lakh rupees.
• The taxpayer should not own any other residential house property on the date of sanction of the loan.
• This benefit is available from the FY 2019-20 and is over and above the existing deduction available for interest on housing of up to INR 200,000.

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Now let us look at how this translates into a tax benefit in the hands of the common man. The Finance Minister in the Budget speech mentioned that the additional deduction should translate into a tax benefit of about INR 7 lakhs to the middle class home buyer over a loan period of 15 years. Evidently, the savings has been arrived at by considering an additional deduction of INR 1.5 lakhs each for 15 years at the tax rate of 31.2 percent which adds up to about INR 7 lakhs.

But is this the reality?

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Given that the limit on the value of the property is pegged at INR 45 lakhs, the benefit of additional deduction of INR 1.5. lakhs will not really be availed by the taxpayers for all the years. This would definitely be helpful during the initial years of the loan, beyond which the existing deduction of INR 2 lakhs will be more than sufficient to cover the interest cost.

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Let us take an example of a loan of INR 40 lakhs availed at 9 percent interest in April 2019 by a taxpayer who meets the conditions to avail this deduction. A quick check on the EMI calculator tells us that the total interest outgo exceeds INR 2 lakhs per annum only during the initial 8 years. The total interest outgo during this period adds up to about INR 24.16 lakhs, which means that the total additional deduction is only INR 8.16 Lakhs (INR 24.16 lakhs minus INR 2 lakhs for 8 years).

At 31.2 percent tax rate, this translates to tax benefit of INR 2.60 lakhs, which is significantly lower than the amount of INR 7 lakhs as quoted by the Finance Minister. Beyond Year 8, the annual interest is below INR 2 lakhs per annum, and hence the additional deduction becomes irrelevant. In reality, the quantum of loan for a property value of INR 45 lakhs will be lower than even the INR 40 lakhs considered in the example. To conclude, while this a move in the right direction, the ceiling on the cost of the house needs to be significantly enhanced for this benefit to translate into reality.