There are many things that the common man expects from the finance minister in the upcoming budget, especially with regards to taxation. One of the areas where taxpayers expect relief is tax on house property income. One would note that last few budgets have had some beneficial proposals for the home owners, intended towards achieving the government’s commitment to “Housing for all” by 2022.
Here are some recommendations for the FM that can ease the burden of home owners and potential buyers, which in turn can help the beleaguered real estate sector.
Increase in standard deduction
As per the provisions of the Income-tax Act, 1961, in the case of a rented house property, the net annual value of the house property is calculated by deducting the amount of municipal taxes paid from the gross rental value (usually the rental income, subject to exceptions). From the net annual value, a standard deduction of 30 per cent is allowed towards repairs and maintenance costs of the house (irrespective of actual spend), along with a deduction for interest paid on housing loan, while determining the taxable income from the house property.
The standard deduction of 30 per cent has not seen any increase since 2002. The government could increase the deduction to at least 50 per cent in view of inflation in the cost of repairs, utilities, and maintenance of homes.
Increase deduction for interest on housing loan
Interest on housing loan can be claimed as a deduction while computing the taxable income. The deduction is limited to Rs 2 lakh for self-occupied house property, subject to underlying conditions, whereas there is no upper limit on the amount of interest that can be claimed as deduction for let-out house property.
The limit of Rs 2 lakh deduction for self-occupied property also includes pre-construction interest, which can be claimed in five equal instalments. However, Budget 2017 had limited the amount of housing loss that could be claimed in the same year to Rs 2 lakh, and provided for carry forward of the remaining loss for eight years for set-off against the house property income.
If the taxpayer does have not positive house property income during the following eight years for set-off, the loss brought forward would lapse and the taxpayer would lose the tax benefit in total.
Given that the significant component of EMIs in the first few years is interest, the government could increase the deduction for interest on housing loan to at least Rs 5 lakh as well as increase the limit for set-off of loss, to reduce the burden of the strained home owners, which would make housing more affordable.
In the context of the global scenario, the cost of housing is much higher in India, hence, a higher tax break on financing costs would bring India’s housing sector at par with many developed countries like the US and European nations.
Impact of these changes on the realty sector
In view of the real estate sector facing a low in the last 3-4 years, the market value of house properties has remained constant. Since this has made the real estate sector not so attractive for investment, providing attractive tax incentives on house property income would stimulate demand and help boost the real estate sector.
(Shalini Jain is Tax Partner, EY India. Vijayalakshmi PG, Senior Tax Professional with EY India also contributed to the article.)