In the 2016-17 budget, the government has provided tax relief to first time buyers of economy homes whose total cost is less than INR 50 lakhs and the home loan is less than INR 35 lakhs. This has been done to give a fillip to the real estate industry and reduce the financial burden of the lower and lower middle class who genuinely need to buy a home. The limitation clauses of the provision will prevent the well-off who invest in multiple homes and or big ticket size home to avail this benefit.
Earlier the cap on the tax deductible interest was INR 2 lakhs per annum and it continues to remain the same for home buys beyond the first one and also for homes costing more than INR 50 lakhs.
The budget provision of 2016-17 now allows an additional INR 50.000/- per annum on interests incurred on home loan towards deduction for calculation of taxable income provided the following three conditions are met – 1) the person should be buying a home for the first time; 2) the total cost of the home should not be over INR 50 lakhs and 3) the loan on this purchase must be limited to INR 35 lakhs. Under these conditions a sum of INR 2.5 lakhs per annum of home loan interest becomes eligible for deduction for calculation of taxable income. The incremental benefit can be best understood with an example.
Let us consider a home loan of INR 35 lakhs with tenure of 20 years without any moratorium. Let us assume the interest to be 10 percent, which is the average prevailing rate. The repayment commences immediately with 12 monthly payments every year for a period of 20 years. For this scenario the EMI will be INR 33,775. At the end of 20 years period the total repayment will add up to INR 81 lakhs and the interest component will be INR 46 lakhs. One can use a mortgage calculator to find these.
The mortgage calculator will reveal that the interest component is INR is 3.47 lakhs in the first year and finally reduces to INR 21,126/- in the last year. It may be noted that for the first 10 years the interest amount is more than the INR 2.5 lakhs per annum and from 11 to 13 years it is between INR 2.5 to 2.0 lakhs per annum. Thereafter it reduces and finally becomes INR 21,126/- in the last year. Thus a borrower stands to get incremental tax savings for 13 years due to the new budget provision.
Let us assume the borrower to be in the 30 % income tax bracket. The tax implications then work out to the following. As per the earlier provision of up to 2 lakhs of interest eligibility for deduction, the total tax savings over the period of 20 years was INR 10.21 lakhs. With new provision of 2.5 lakhs of interest deduction, the revised tax savings work out to INR 11.99 lakhs. Thus this budget gives an incremental benefit of INR 1.78 lakhs which is quite a tidy sum.
The calculation is indicative and provides order of magnitude of savings. Interest exemption is permissible only after taking possession of the house. Projects will require some construction time and interest paid during that period can only be availed in 5 equal installments in the next 5 years. Thus it may not be possible to utilize all the interests paid during the construction period for availing tax benefit. Further, if the home loan rate is higher the savings will be greater. Likewise the tax savings will be lower if the interest rate is lower. Hence it is always ideal to go for projects nearing completion to avail maximum tax benefit. Besides, this gives the buyer a chance to see what he is buying. Of course, this will entail bigger and more conceated payment of own margin money.
It is evident that the developers in Pune and the builders around Pune will suitably modify their projects to bring the entire cost within 50 lakhs to take advantage of the new budget provision. Builders in high cost areas of Pune will shift towards compact 2BHK homes, while the low cost areas will continue to feature regular 2BHK projects. Pune will witness a shift from 3BHK to 2BHK homes. Areas in the neighborhood of Pune which are low in cost are able to offer regular 2BHK and 3 BHK houses within 50 lakhs will see a greater spurt in demand.