'Housing for all' has been at the top of the agenda of the government. Budget 2017 had introduced certain measures to boost the real estate sector and achieve the target by 2022.
Implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA) with effect from May 1, 2017, was another major step toward this end. To further promote affordable housing, the following tax reforms could be considered in the forthcoming Budget 2018.
i. Housing loss set-off limit of Rs.2 lakhs should be increased
Finance Act 2017 restricted the loss from house property which could be set off against other income, to Rs. 2 lakhs. House property loss in excess of Rs.2 lakhs has to be carried forward and adjusted against the rental income of future years.
For example, if the interest paid on housing loan after setting off the rental income earned is Rs.3 lakhs, one can set off loss of Rs.2 lakhs against other income and the balance loss of Rs.1 lakh can be carried forward for set off against house property income of any of the next 8 years.
Since a housing loan could run for 20 -25 years, it is unlikely that there will be sufficient rental income in next 8 years to absorb the interest of that particular year as well as the loss brought forward. In that case, the loss will lapse after 8 years.
Given the increasing cost of property and rate at which loans are availed, this limit of Rs.2 lakhs could be increased to Rs.3 lakhs per year to allow tax payers to set off a larger part of the house property loss against other income.
ii. There should be additional deduction for pre-construction interest
The Income Tax Act provides that interest on housing loan paid for the period during which a house is under construction, can be claimed as a deduction in 5 equal instalments from the financial year in which the house property is completed.
Prima facie this is a good tax benefit. However, practically, most taxpayers lose out on the deduction for pre-construction interest since this amount is included in the overall limit of Rs.2 lakh fixed for the interest on housing loan deductible in case of self-occupied property.
For instance, if the pre-construction interest was Rs.5 lakh, a deduction of Rs.1 lakh can be claimed in the 5 years starting with the year in which the house is complete. In most cases, interest for a financial year exceeds Rs.2 lakhs, leaving no further room for a deduction for the pre-construction interest. Pre-construction interest thus goes without a deduction.
Hence, the deduction for the pre-construction interest should be allowed in the year of payment or a separate limit should be prescribed for the deduction over and above the regular deduction of Rs. 2 lakh per year.
iii. Delay in construction of property
The deduction for interest on housing loan is extended to Rs.2 lakh instead of Rs.30,000, only if the construction of the house property is completed within 5 years from the end of the financial year in which the loan has been taken.
Sections 54 and 54F of the Act provide for exemption for long-term capital gains if the tax payer invests sale proceeds to construct a residential house within a period of 3 years.
Tax payers could lose the tax benefit for no fault of theirs, if the construction is delayed by the builder beyond this period. Though RERA aims at ensuring timely completion of housing projects, tax laws should recognize this aspect and provide for relaxation of the period in case the project is delayed.
iv. Incentives for first time home buyers
Section 80EE of the Act provided an additional deduction of Rs.50,000 for first time home buyers whose housing loan was sanctioned during the period April 1, 2016 to March 31, 2017. This benefit should be extended to first time home buyers with loans sanctioned beyond 31 March 2017 also.
One of the conditions to avail this deduction is that the value of the property should not be more than Rs.50 lakhs, irrespective of the size and location of the house.
Consequently, an individual who buys a house property in a Tier 1 city, where property prices are much higher than this limit, does not benefit from this section.
It is vital to take into account the size and location of the house property and fix limits accordingly, to provide benefit for first time home buyers across the country.
Living in one's own house is still a distant dream for many tax payers. Impetus in the form of tax benefits to such tax payers may help them realize this dream and also fulfill the government's 'housing for all' objective.
By Homi Mistry is a Partner with Deloitte India.