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Budget Wishlist | Delink tax relief on home loan principal from Section 80C

Budget Wishlist | Delink tax relief on home loan principal from Section 80C
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First Published: Tue, Feb 19 2008. 10 46 AM IST

Sunil Jindal, CEO, SVP Group
Sunil Jindal, CEO, SVP Group
Updated: Tue, Feb 19 2008. 10 46 AM IST
Sunil Jindal, CEO, SVP Group
New Delhi: The fact that real estate is one of the greatest drivers of economic growth can hardly be understated. Consider this: according to the Federation of Indian Chambers of Commerce and Industry, while 5% of the country’s GDP is contributed by housing alone, the real estate sector as a whole is the largest employer in the country after agriculture.
The Union Government, in recognition of real estate and infrastructure as the engines of GDP growth, has earmarked an outlay of as much as Rs20,00,000 crore.
While the amount is certainly worthy of appreciation, the Finance Minister might consider providing further fillip, both at the micro and macro levels, to ensure not only the growth of the sector, but also that the benefits of growth reach out to larger sections of the citizenry.
Tax relief on housing loans
Currently, the Income Tax Act, 1961, provides maximum relief of Rs1 lakh for principal repaid on a home loan during a year. This relief is clubbed with other investments/ contributions such as those made in equity-linked savings schemes, PPF, NSC, insurance premium, among others.
It is recommended that the existing relief be completely decoupled from Section 80C and a new section be inserted in the Act to allow for deduction based on total value of the house.
If the taxpayer part-finances the purchase of his first house only by taking a home loan, he should be able to write off the entire amount of the loan (principal) over the period for which he has taken it.
So if, for instance, he has taken a Rs25 lakh loan, which he wants to repay over, say, 10 years, the relief available to him per year on average should be Rs2.5 lakh, and independent of the relief he would claim for other investments/contributions made under Section 80C.
However, the house should not have a total (super) built-up area of more than a pre-specified limit. In my opinion, a house of not more than 700sq feet should qualify. The caveat will give the first-time buyer a sense of security, as it would help him achieve what is usually the first personal financial goal of the average Indian family, without costing the exchequer too much.
Section 24 of the Act provides for relief of up to Rs1.5 lakh towards interest paid on a home loan taken for the purchase of self-occupied property. In my opinion, the limit does not serve any real purpose and provides little incentive to buy a house.
On a Rs30 lakh loan, at an interest rate of 11%, the purchaser would forego relief on half the interest cost. A ceiling of Rs5 lakh would be more realistic.
At the same time, there should be a 2-3% reduction in home loan interest rates.
Service tax on works contract
There are three types of works contract based on property ownership or occupation
a. On property owned/occupied by the builder and developed by him
b. On property owned/occupied either by the builder or his JV partner or by both, on which development is carried out jointly
c. On property owned/occupied by a third party, but developed by the builder
Development on land owned or occupied by the builder should not suffer service tax, since the act of developing such premises is not a service.
Development activity in (c) above is clearly a service, and cannot escape tax. But (a) and (b) above do not qualify as services, and should, logically speaking, not suffer service tax. I am hopeful the Finance Minister will consider this aspect when he announces the Budget, as several players in the industry as well as real estate associations have touched upon this anomaly.
Taxes on inputs
Growth is a given for the Indian economy and a key indicator of GDP acceleration is industrial consumption, especially steel and cement.
There are two ways to increase the consumption of these two commodities. The first is to increase the disposable income of the citizenry at large. This can be done by rationalizing taxes, and has been covered above in terms of relief on home loans. A more financially empowered citizenry would have an upward spiral effect on industrial consumption and would sustain growth in the long run.
The other approach is to make the commodities themselves more affordable. This can be done by implementing an across-the-board reduction in duties on these two key inputs. Here again there would be a chain reaction and the revenue loss to the exchequer would more than offset by tax collections arising from the resulting higher incomes generated by real estate companies, housing finance institutions, ancillary industries such as ceramics, paints and furniture, and the house purchaser himself.
Land prices
The higher the land price, the more the ultimate purchaser of the property has to shell out. Land is the biggest component of cost in most real estate projects and if it can be rationalized, both the developer and the purchaser would stand to gain. The former would see quicker turnaround of saleable property, while the latter would get more affordable housing.
Property in India is subject to high rates of stamp duty, going up to as much as 14% in some states. To make matters worse, the levy is applicable not just on the first transaction, but on all subsequent transfers of the same property from one pair of hands to another. In order to rectify this anomaly, uniform duty rates, administered by the Centre, should apply. Some mechanism of duty credit should also be allowed, to offset at least partially, the duty paid on the immediately preceeding transfer of the same property.
The sum and substance of my thoughts are that unless the citizen is empowered, the growth of the real estate sector and that of GDP cannot be sustained.
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First Published: Tue, Feb 19 2008. 10 46 AM IST