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Owning a home is a basic need and not a luxury. While the government is taking proactive measures to steer the economy towards a high growth track, an insignificant amount of funds has been invested in the Real estate and Home Decor sector. Further, there have not been any major incentives or changes to spur demand and spending, disappointing the homebuyers, investors as well as developers.

In Budget 2020, the Finance Minister introduced the new income tax slab rates and several new policies pertaining to Agriculture and the Corporate sector. The FM also threw light on the topic of home loans during her budget presentation.

In order to ensure that more persons avail of the additional deduction of up to ₹1.5 lakhs for interest payment and to further incentivize affordable housing, FM proposed to extend the date of loan sanction for availing this additional deduction by one more year to March 2021. 

India’s Finance Minister Nirmala Sitharaman

Besides, she has also proposed to extend by one year the date of approval of affordable housing projects for availing of the tax holiday on profits earned by builders.

Here are some of the most significant points about home loan incentives that the FM covered in her budget announcement apart from the extension on the deduction for interest paid on home loans.

1. Loans availed from any kind of lender is eligible for a tax deduction

Until the AY 2019-2020, home loan borrowers could only claim a deduction against the principal loan amount and interest component if the home loan was taken from a recognized lender, i.e a bank or housing finance company.

In Budget 2020, FM announced that borrowers will now be eligible to claim deductions against the interest payment from all parties including private lenders, employers, family members or friends. Also, borrowers need to obtain a certificate from their (non-bank or HFC) lenders to avail of this deduction.

2. Deduction in respect of interest paid towards home loan during the pre-construction period

The Pre-construction period is the time gap between borrowing money and the completion of construction of the house.

As per the new Income Tax regime, borrowers can avail of a deduction against the total interest amount paid, before they receive possession of their property, i.e. in the pre-delivery phase, as a deduction, in 5 equal installments starting from the year in which the property is acquired or construction is completed. 

However, the maximum interest rate deduction one can claim remains capped at ₹200,000 for a self-occupied property.

3. Joint loans can be split three-ways if the lender permits it

The main reason why people prefer taking a joint loan is to avail of tax benefits on the principal loan amount and the interest component individually. For instance, if a borrower obtained a joint loan with his partner, each one of them can claim a deduction of ₹150,000 on the principal loan amount and ₹200,000 on the interest payment. 

Now, if the borrower has a working son or daughter, and the bank permits the joint applicants to split the home loan three ways, then all three co-borrowers can avail the deduction and this can help you in claiming a larger tax benefit. 

To claim this deduction all the co-borrowers must be co-owners of the property.

4.Total loss from a House Property 

The total loss arising from a housing property that can be adjusted with the five income tax heads (other than salary) is capped at ₹200,000 in this budget. 

Furthermore, if one is unable to set off the ₹200,000 interest amount against any available income head, then the surplus interest amount, (which one is unable to set-off) may be carried forward, for no more than eight assessment years, at maximum.

5.Deduction on Principal Amount, Stamp Duty and Registration Charges

The principal portion of the installment paid for the year is allowed as a deduction under Section 80C to the extent of ₹1.5 lakh. In order to avail of this benefit, the house property should not be sold within 5 years of possession. Otherwise, the deduction claimed earlier will be reversed.

Besides claiming the deduction for principal repayment, a deduction for stamp duty and registration charges can also be claimed u/s 80C in the year in which these expenses are incurred and within the overall limit of ₹1.5 lakhs.

6.Additional deduction u/s 80EE and 80EEA 

  • Additional deduction u/s 80 EE: The ceiling limit to avail of this deduction is ₹50,000. The value of the house property must not exceed ₹ 50 lakhs and the loan taken should be within ₹35 lakhs. The loan must have been sanctioned between 1st April 2016 to 31st March 2017. And on the date of sanction of loan, an individual does not own any other house. 
  • Additional deduction u/s 80 EEA: The ceiling limit to avail of this deduction is ₹150,000. The value of the house property must not exceed ₹ 45 lakhs. The loan must have been sanctioned between 1 April 2019 to 31 March 2020. And on the date of sanction of loan, an individual does not own any other house. 

The individual can either avail deduction u/s 80EE or 80EEA, not both. 

DeductionSectionMaximum deduction in ₹Conditions
Principal Amt80C150,000House property should not be sold within 5 years of possession.
Stamp duty & Registration80C150,000The maximum deduction allowed is inclusive of the principal repayment. It can be claimed only in the year in which these expenses are incurred.
Interest24(b)200,000Purpose of loan – construction of a house and the construction must be completed within 5 years from the end of FY in which the loan was taken.
Interest80EE50,000Value of property ≤ ₹50 lakhs Amount of loan ≤ ₹35 lakhs
Interest80EEA150,000Value of property ≤ ₹45 lakhs
Above is a table summarizing all the six points.

With the new tax regime in place, exemptions pertaining to the home loans and real estate sector will go away, for good. The government wishes to simplify the tax procedure by removing all exemptions but this will directly affect the housing sector. 

While the government continues to incentivize affordable housing through the extension of home loan sanction date and additional deductions, the home buyers are contemplating buying a house due to the new tax regime that offers no motive.

The principal and the interest component of the loan which was previously allowed as a deduction will now be taxed. From next year onwards, buyers will have to factor in the possibility of shelling out more from their income if they were to buy a property if no deductions are available. 

Exemptions act as a motivating factor in the purchase decision of a house. And if done away with, it will have implications on the banking sector as well as the real estate sector.

The housing and real estate sector is facing a problem from the demand side and this move will add on to its misery. 

Related Posts – Budget 2020 , Home Loans , Pradhan Mantri Awas Yojana

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