The Finance Minister has proposed in the Union Budget of 2019 that an additional deduction of Rs 1.5 lakhs may be availed for the interest paid on the home loans for the residential property but home buyers will have to fulfill some criteria before they can avail it. At present, the interest paid on home loan for up to Rs 2 lakhs in a year for self-occupied property qualifies for a deduction under section 24 of the IT Act. The additional interest of Rs 1.5 lakhs will qualify for a deduction under the newly introduced section 80 EEA.
Combining these two, the total amount of deduction that a taxpayer might avail will be Rs 3.5 lakhs a year and this will come to about Rs 7 lakhs for the middle-class average home buyer if the loan period is of 15 years.
Key criteria and other aspects
As mentioned earlier, some criteria have to be met before the home buyer can avail this facility.
To start with, the loan has to be sanctioned by the bank or any other financial institution during the 1st of April to 31st March 2020. The tax benefit will not be applicable on a loan taken before 31st March 2019.
The stamp duty value of the house property should not exceed Rs 45 lakhs. Barring cities like Mumbai, where home prices are very costly, a 2 BHK house is readily available at this price in most locations and the registration price of the home is Rs 45 lakhs. If the price of the house exceeds this amount, then this deduction cannot be claimed.
Also, the home buyers should not own any residential house property on the date of the sanction of the loan and so this tax benefit is mostly directed towards the new home buyers who do not have a home now.
On the other hand, if one has already availed a deduction under this section, the same interest amount cannot be availed under any other section of the IT Act. Hence, the tax benefit cannot be availed under Section 24 and Section 80 EEA simultaneously. If the amount exceeds that limit, one can claim deduction under both sections likewise.
On the other hand, one can only claim this deduction if the carpet area of the home is not exceeding 645 sq. feet in metro cities and 968 sq. feet in cities or towns other than Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata and Mumbai. This will also only be effective from the 1st of September 2019. Hence, considering the fact that the carpet area is about 30% less than the super built area if one is looking for a house bigger than 1000 sq. feet in metro cites or 1350 in other cities, this tax deduction cannot be availed.
There are some questions that are still confusing the home buyer though.
Some other things worth noting
What if the loan is taken in the Financial Year 2019- 20 and the interest portion exceed Rs 1.5 lakhs, can the interest deduction be availed in both the sections? According to industry experts, this new tax deduction will be available mostly on affordable homes. In case of purchase of such a house, an individual will be able to claim a deduction of Rs 2 lakhs under Section 24 of the IT Act and there will also be an additional deduction of Rs 1.5 lakhs under the section 80 EEA, provided the loan has been taken from a financial institution. So, in case the loan is taken for the FY 2019- 20, but the interest exceeds Rs 1.5 lakhs, then the home buyer will be able to claim deduction under both Section 24 and Section 80 EEA and it will take the total deduction to Rs 3.5 lakhs, provided the other criteria are met.
There are some other concerns as well. In case of affordable housing, the upper cap is about Rs 45 lakhs and one can get Rs 3.21 lakhs benefit as one cannot get more than Rs 36 lakhs as the home loan. Hence, according to experts, the upper cap on affordable housing should be extended so that the buyers can avail Rs 3.5 lakhs tax exemptions. This is because homebuyers can get only 80% of the home price as loan amount, which in the case of a home priced Rs 45 lakhs, will be Rs 36 lakhs. The rate of interest charged by most financial institutions is about 9%. If the home loan tenure is about 20 years, the EMI would come to Rs 32, 390. In the first year, for the total EMI of Rs 3,88,680, the principal amount is Rs 67, 416 and the interest component is Rs 3,21, 264. This calculation is based on the fact that the principal amount is monthly reduced. So, when the maximum tax benefit is Rs 3.5 lakhs, the taxpayer will be claiming a benefit of only Rs 3,21, 264 in the first year.
The above deductions may be applicable if the banks are allowed to give a loan of about 80% for a home costing above Rs 30 lakhs. As of now, for a home priced below Rs 30 lakhs, one can get 90% of the total price as loan and in case it is priced above Rs 30 lakhs, only 80% is available. So for the current tax deduction to work, the cap of Rs 45 lakhs has to be raised from affordable housing or banks should be allowed to finance more than 80% of the total price of the home in the affordable housing segment. It remains to be seen if the other adjustments are made in the months to come.