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A Cause For Cheer

The introduction of additional tax benefit in this year's Union Budget gives you more reasons to buy a home

A Cause For Cheer
Illustration by Safia Zahid

Homebuyers have a reason to cheer after Finance Minister Nirmala Sitharaman presented the Union Budget on July 5. In a bid to boost Housing for All, the government has introduced an additional income tax deduction of Rs 1.5 lakh on the interest paid on home loan under Section 80EEA. It comes with a few riders, though, but before we get there, let us look at the current scenario. All existing borrowers are already eligible for an annual deduction of up to Rs 2 lakh under Section 24(b) until their loans are paid off. The additional deduction will be over and above the Rs 2 lakh limit. "Deductions under Sections 24(b) and 80EEA are independent of each other, and the interest you are paying cannot be considered for both sections. However, you can claim an aggregate deduction of Rs 3.5 lakh per year (using each Section separately)," says Kuldip Kumar, Partner and Leader, Personal Tax, at PwC India. You can claim the additional benefit only when the annual interest on your home loan exceeds Rs 2 lakh. Otherwise, your tax benefit will be limited to Section 24(b) as before.

Now comes the caveat. Only individual taxpayers who do not own any property on the day of the home loan approval can avail of this additional deduction. So, housing co-operatives, HUFs (Hindu Undivided Families) or companies cannot benefit from this provision. The property under question can be self-occupied or let-out, but the housing loan should be taken only from a financial institution such as a bank or a housing finance company.

What Homebuyers Need to Know

Property size: There is a cap on the size of the property. "Carpet areas have been specified in the memorandum of the Finance Bill 2019. The carpet area should not exceed 60 sq. m. (645 sq. ft) in metropolitan cities of Bengaluru, Chennai, the National Capital Region (limited to Delhi, Noida and Greater Noida, Ghaziabad, Gurgaon and Faridabad), Hyderabad, Kolkata and Mumbai (entire Mumbai Metropolitan Region). In other cities or towns, it should not be more than 90 sq. m. (968 sq. ft.)," says Anshuman Magazine, Chairman and CEO (India, South-east Asia, Middle East and Africa), CBRE.

Given the cap on property sizes, this is bound to help people purchase smaller units and thus boost the affordable housing segment. "Usually, 1-BHK flats would have a carpet area of 645 sq. ft, the maximum permissible space for properties located in metropolitan cities. The other provision for non-metros would mostly cover 2-BHK flats," says Rishi Mehra, CEO of Noida-based financial services company Wishfin.com.

Property value & loan amount: To get the additional tax benefit, the stamp duty value of the property should not exceed Rs 45 lakh. "But there is no cap on the loan amount, and one can borrow to cover the cost of the house property if it is in sync with the stamp duty value. However, the loan must be approved between April 1, 2019, and March 31, 2020, by a financial institution," says Kumar of PwC India.

Although there is no official cap on the loan amount, it cannot be more than Rs 45 lakh, points out Mehra of Wishfin. "The cap in the property value means the maximum loan amount would most likely be Rs 36 lakh, going by the loan-to-value ratio used by lenders nowadays. This is how it works. A loan amount between Rs 30 lakh and Rs 75 lakh is usually granted at 80 per cent of the property value. If a lender has a provision for financing more than 80 per cent in the said loan range, the maximum loan limit may exceed Rs 36 lakh," he says.

When property is jointly owned: As properties are often purchased jointly, one should also know the terms and conditions in such cases. "Those claiming deduction under 80EEA must be co-owners, co-borrowers and must contribute to the loan EMI," says Archit Gupta, Founder and CEO of Bengaluru-based fintech company ClearTax. Each joint owner can claim a tax deduction up to Rs 1.5 lakh, subject to fulfilling all other conditions.

How You Gain

As Section 24(b) already provides a deduction up to Rs 2 lakh, the additional benefit will benefit people whose property value is more than Rs 20 lakh or even higher. "The average interest rate for this loan quantum can be anywhere between 8.75-9.20 per cent per annum. Assuming that an individual has availed of a loan of Rs 36 lakh for a house property valued at Rs 45 lakh on April 2, 2019, for 20 years, the interest payment can amount to Rs 3,12,256-3,28,472 until March 31, 2020. This is a much larger amount than Rs 2 lakh, and therefore, the additional tax deduction will be helpful," explains Mehra of Wishfin. In this case, you will be paying an interest amount above Rs 2 lakh for half the loan tenure. So, you should continue claiming the additional deduction until that time.

@naveenkumar80