Budget 2016-17 did not have much to offer to the individual taxpayer, as there was no change in slab rates nor was there an increase in deduction limits under various sections. However, it offered some relief to those who had recently bought or are planning to buy an under-construction apartment. The change, which is related to deduction against repayment of home loan, is small but holds big benefits for many homebuyers. In a recent story (http://bit.ly/1Qjwg84), we had stated how real estate project delays increase the effective cost of home buying by more than 25% for a homebuyer, and that the loss of tax benefit due to project delay is the biggest culprit. The new tax benefit offered in the Budget helps here. Here’s how.
Existing tax rules
Tax benefit on repayment of home loan helps homebuyers bring down the tax outgo substantially. According to the Income-tax Act, 1961, a borrower can claim deduction under section 80C against principal repayment, which has an overall limit of 1.5 lakh, and up to 2 lakh for payment of interest under section 24(b) for a self-acquired house. If the house is leased out, then the entire interest paid on home loan can be claimed as deduction. These tax breaks, however, are available based on the ownership of property.
Until the construction of the property is complete and you have the registration and ownership documents, you may not be able to claim these deductions. So, no possession means no tax benefit on the huge home loan. And that’s not all.
The bigger problem is when construction of a property gets delayed.
As per the prevailing tax rules, if the property does not get completed within three years, the maximum deduction allowed to a taxpayer for interest on home loan reduces to 30,000 per annum. One can only claim deduction up to 2 lakh if the property she buys gets completed within three years from the year in which the loan was taken. However, given the current condition of the real estate market, on an average, residential projects are getting delayed by 24-30 months. So, for those who take a loan to buy an under-construction property, delay in delivery leads to a substantial hit on tax savings.
In his Budget proposal for 2016-17, the finance minister proposed to increase the time limit for completion of projects from three years to five years. So, once implemented, a homebuyer will be able to avail tax deduction of 2 lakh on interest paid even if the house is ready in five years from the end of the finance year in which the home loan was taken.
If you take a home loan in August 2016, and you get the house in March 2022 or before, you get the full 2 lakh tax break. However, if you get the house after March 2022, you will not get the full benefit.