Why the Government Should Revise the Deduction Limit for Home Loans

Since the working class moved to work remotely after the covid-19 outbreak, many homeowners shifted back to their hometowns, which generated a demand for new and bigger homes. Furthermore, the lowered home loan interest rates and reduced real estate prices during the covid-19 pandemic have led to a splurge in demand for housing in the last three years.

However, since then, India is witnessing a price increase in the housing market segment, especially in metro cities like Mumbai, Bengaluru, Hyderabad, Chennai, and Kolkata due to the robust housing demand and a steep rise in key construction materials like steel and cement. This is why housing is becoming unaffordable for the primary home buyers - who actually want to live in the house they are buying.

To add to the trouble of home buyers, in order to control inflation, the Reserve Bank of India (RBI) announced a hike in the repo rate five times from May 2022 to December 2022, resulting in a splurge in the home loan interest rates. The jump in repo rate from 4% in May 2022 to 6.25% in December 2022 has resulted in around a 2% increase in the home loan interest rates across the banks and Housing Finance Companies. This has significantly increased the home loan EMIs and put enormous pressure on household budgets. In most households, home loan EMI is the biggest fixed monthly expense.

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However, while the prices of houses and the cost of home loans have moved up over the years, the government has not made any substantial changes in the home loan tax benefits.

Having said that, despite the price increase in the primary housing market segment and the spike in the home loan interest rates, the demand for primary houses is still intact. That's why, to sustain the demand and provide some relief to the taxpayers, Finance Minister Ms Nirmala Sitharaman needs to introduce home loan tax benefits-friendly measures in the upcoming Union Budget 2023-24.

Here's why home loan deduction limits need to be revised in the Union Budget 2023-24:

Too many tax-saving options under Section 80C:

Currently, under Section 80(C) of the Income Tax Act, you can claim a tax deduction of only up to Rs 1.5 lakhs on the home loan principal amount repayment.

Besides, the basket of eligible tax-saving options is overloaded with numerous investments and expenses, such as Equity Linked Saving Scheme (ELSS), National Pension Scheme (NPS), Public Provident Fund (PPF), Employee Provident Fund (EPF), children's tuition fee, etc. The 80(C) limit can get exhausted with just children's tuition fees and Employee Provident Fund. So, there is hardly any room to claim a home loan deduction. And, even if there is some room left, the term insurance premium can easily fill the gap.

The government needs to revamp this long pending demand of taxpayers in the upcoming budget and enhance the deduction limit under Section 80C and provide a separate deduction for home loan principal repayment. This will help boost the primary housing market segment and make housing affordable to the middle class.

Insufficient deduction limit under Section 24(b):

Home loan borrowers, besides the principal repayment, can currently claim an income tax deduction on the interest paid towards a home loan under Section 24(b) of the Income Tax Act, 1961. A maximum of Rs 2 lakhs per financial year can be claimed under this Section.

A home loan is a big amount loan, which is usually taken for 15 to 25 years loan tenure. The more the loan amount and the longer the loan tenure, the more will be the total interest outgo. Hence, home loan borrowers pay a substantial amount of interest on their home loans. Since a home loan is a long-term commitment, the loan repayment is a long time financial burden on the borrowers.

While home buyers and existing home loan borrowers are bearing the brunt of high home loan interest rates and increased EMIs, the tax deduction on home loan interest payments has not been revised in years. The total yearly home loan interest payment is substantially higher than the maximum limit of the deduction that can be claimed.

Hence, amidst the rising home loan interest rate scenario, the government needs to enhance the home loan interest payment deduction limit from Rs 2 lakhs to at least Rs 4 lakhs. The increased tax deduction limit will help taxpayers bear the increased cost of home loans.

Inadequate capital gain criteria under Section 54:

Under Section 54 of the Income Tax Act, a homeowner selling a residential property can avail of tax exemptions from the capital gains if the gains are invested in a new residential property. However, to obtain the tax exemption, the seller has to purchase a new home within a period of either one year before or two years after the date of sale/transfer. If the seller is constructing the house or investing in a property under construction, he/she has to construct it within three years from the date of sale/transfer.

However, many residential projects require more than three years to get completed, causing a delay in setting-off gains in under-constructed properties. Hence, the timeline for the completion of under-construction properties should be relooked and increased to a minimum of 5 years.

Final words:

The home loan tax benefits are inadequate compared to the huge interest payment and long-term financial burden on the household budget. With the surge in repo rates, home loan interest rates are likely to move up further. This can create a huge financial burden on a common man who is paying taxes and EMIs, and yet trying to save and invest towards the family's future amidst rising inflation.

Finance Minister Ms Nirmala Sitharaman needs to support the middle-class home buyer by revising the tax deduction pertaining to home loan principal repayment in Section 80(C), providing a separate deduction limit for it, and enhancing the deduction under Section 24(B) to at least Rs 4 lakhs. The long pending revisions of deduction limits for a home loan can provide some relief to home buyers and existing home loan borrowers amidst the rising interest rate scenario.