Taxing times ahead for rich, boost for low-cost housing

  • Surcharge hiked for those earning above 2 crore; higher deduction on home loan interest for low-cost housing
  • Extra deduction for interest paid on loans taken in current FY for buying a house priced up to 45 lakh

Ashwini Kumar Sharma, Shaikh Zoaib Saleem, Neil Borate
Updated6 Jul 2019, 01:32 AM IST
According to tax department data, as on March 2019, a little over 200,000 individuals with income between  <span class='webrupee'>₹</span>50 lakh and  <span class='webrupee'>₹</span>1 crore filed their ITR, while about 100,000 individuals with income above  <span class='webrupee'>₹</span>1 crore filed their ITR.
According to tax department data, as on March 2019, a little over 200,000 individuals with income between ₹50 lakh and ₹1 crore filed their ITR, while about 100,000 individuals with income above ₹1 crore filed their ITR.

Finance minister Nirmala Sitharaman’s maiden budget speech lasted for over two hours but she spent about five minutes on direct taxes. Clearly, after February’s populist Interim Budget, there was little room to offer more benefits. But the budget was not entirely without implications for taxpayers.

Stating that those in the highest tax brackets needed to contribute more towards nation building, Budget 2019 increased the tax burden on the super-rich with taxable income above 2 crore. It also had an incentive for buyers of affordable homes and pushed a pending National Pension System (NPS) notification making the withdrawal portion from NPS on maturity tax-free.

Increase in surcharge

Surcharge is an additional levy over and above the tax amount. Going forward, those earning between 2 crore and 5 crore will have to pay 25% surcharge on the tax amount, while those earning above 5 crore will have to pay a surcharge of 37% on the tax amount.

Till now, both the categories were paying 15% surcharge. There are already two slabs for surcharge—10% surcharge is levied on those with total income between 50 lakh and 1 crore and 15% on those with taxable income between 1 crore and 2 crore.

The current highest rate of applicable income tax rate is 35.88%. As finance minister said in her speech, the new surcharge rate will increase effective income tax rate by 3% and 7%, for those earning between 2 crore to 5 crore and those earning above 5 crore, respectively. Therefore, the highest rate will now be 39% and 42.74%, respectively, for the two segments of income (see graph).

However, there aren’t too many super-rich with a taxable income above 2 crore and so the revenue inflow may not be significant, according to Homi Mistry, partner, Deloitte India, a tax and audit firm.

According to data from the tax department, as on March 2019, a little over 200,000 individuals with income between 50 lakh and 1 crore filed their income tax return (ITR), while about 100,000 individuals with income above 1 crore filed their ITR.

Home loan deduction

Even though there was limited room for the FM to announce tax sops, the first budget of the government couldn’t be without any relief to small tax payers. The budget announced an extra deduction to homebuyers in the affordable housing category. An additional deduction of up to 1.5 lakh will be allowed for interest paid on loans sanctioned in the current financial year for buying an affordable house priced up to 45 lakh.

This deduction will be over and above the deduction of 2 lakh allowed on a home loan interest payment. Currently, if one avails a home loan to purchase or construct a house, the capital repayment and interest paid on the loan qualifies for deduction under separate Sections of the Income-tax Act.


While the principal repayment qualifies for deduction under Section 80C and has an overall limit of 1.5 lakh a year, the interest payment qualifies for deduction under Section 24(b), with an overall limit of 2 lakh a year.

“Additional deduction of interest for 1.5 lakh for affordable houses priced up to 45 lakh is a welcome push to affordable housing. The taxpayer, however, should not be owning any house as on the date of sanction of the loan. This will result in saving of around 7 lakh over a loan period of 15 years,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, a chartered accountancy firm.

“However, no increase in deduction for other houses as well as continuation of restriction for set-off of house property loss to 2 lakh would be a dampener for existing loans,” he added.

The change will be carried out by introducing Section 80EEA in the Income-tax Act from 1 April 2020 so that you can claim the additional deduction in assessment year 2020-21.

The government had introduced a similar additional benefit of 50,000 under Section 80EE of the Act for home loans taken in financial year 2016-17, for houses valued under 50 lakh. If you have already availed this scheme, you will not be able to avail the one announced in Budget 2019.

The new additional deduction will mostly benefit homebuyers in smaller towns or tier-2 and tier-3 cities; the impact will be limited in tier-1 and metro cities owing to higher real estate prices.

The NPS benefit

The budget also pushed a pending notification to make the maturity corpus of NPS—60% that can be taken as lump sum—tax-free. The Finance Bill notified the cabinet decision to make NPS tax-free, something the Interim Budget missed out.

For central government employees, even investment in NPS tier-2 account will qualify for a deduction under the Section 80C basket. The budget also specifies a lock-in of three years for funds in the tier-2 account. However, there is no clarity on the tax payable on returns from this account.

“Central government employees investing in NPS tier-2 will most likely have to pay tax on its returns, as per their slab rate if the taxation on tier-2 is not clarified,” said Sumit Shukla, CEO, HDFC Pension Fund Management Co. Ltd.

ashwini.s@livemint.com

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First Published:5 Jul 2019, 11:55 PM IST
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