Recently in these columns, we published an article giving details of the raw deal for home loan borrowers, as suggested in the revised discussion paper on the new Direct Taxes Code (DTC).

In the present tax regime, interest paid on home loans up to Rs. 150,000 pa (for self-occupied property) and principal loan repaid up to Rs. 100,000 (along with other specified instruments) qualify for income tax relief.

Even interest paid during the construction period and the amount spent on registering the property qualify. The discussion paper on revised DTC has suggested providing income tax relief to home loan borrowers only on interest paid on home loan up to Rs. 150,000 pa (self-occupied property). Such deduction would be a part of total savings of Rs. 300,000 pa, as suggested in the DTC.

It appears the deduction of Rs. 150,000 allowed for interest paid on borrowed capital would be restricted to people owning and occupying only one house.

This move may discourage people to opt for a second house. The step to remove existing tax incentives will surely burden the common man who dreams of owning a house.

The removal of tax sops may not hurt the rich and in fact, people having higher income would be benefited as they tend to save a lot of tax outgoing as per the proposed tax slabs and also it appears they continue to get tax relief on the rented property.

Clear indicators

Here are two illustrations on the effect of suggested tax relief, one for a person with Rs. 3 lakh income and another for a more affluent person with income of Rs. 10 lakh pa. The present and proposed income tax slabs in the DTC are indicated in the table.

The common man, with an income of Rs. 300,000 pa, had taken a home loan of Rs. 8 lakh three years ago for purchasing a plot and constructing a house on it, which he has occupied.

In the third year, he has paid 12 EMIs of Rs. 10,573 at 10 per cent interest. The interest portion is Rs. 66,973 and the principal amount repaid is Rs. 59,903.

He has also paid PEMI interest of Rs. 30,000 during the construction period. His savings include Rs. 15,000 under mandatory PF contribution and Rs. 15,000 towards other specified savings like VPF (Voluntary PF) contribution and life insurance premiums.

Under the present tax regime, his tax liability becomes nil, after computing the interest paid on home loan under Sec 24 (b) of IT Act and principal repaid under Sec 80(C) along with other specified savings.

For the same common man and same loan, his tax burden increases in the suggested DTC. Since only interest paid on home loan would become eligible for deduction, along with other savings, his tax liability comes to Rs. 4,432 (excluding principal loan paid and interest paid during the construction period), which has to be proportionately deducted from his salary from April itself. Finding it difficult, the common man may have to stop VPF contributions amounting to Rs. 4,500. Then his tax liability works out to Rs. 4,895. This way, the common man not only has to forego his savings of Rs. 4,500 but has to shell out income tax of Rs. 4,895.

Now, let us take the example of an affluent person having an income of Rs. 10 lakh. He has taken a home loan of Rs. 30 lakh for self-occupied property.

He has paid 12 EMIs of Rs. 39,646, out of which interest paid is Rs. 291,717 and principal repaid is Rs. 184,025.

He has also saved Rs. 150,000, out of which Rs. 120,000 qualifies for deduction under Sec 80C.

Under the present tax regime, the income tax liability works out to Rs. 82,400, after computing the interest paid on home loan under Sec. 24 (b) of IT Act and principal repaid under Sec 80(C) along with specified savings.

Less liability

For the same person with the same loan parameters, in the proposed DTC regime, the tax liability comes down to Rs. 55,620, leading to savings of Rs. 26,780.

These illustrations clearly show that if income tax incentives as suggested in the revised DTC are implemented in toto, the common man may not even dream of owning a shelter. Not only will he have to shell out more taxes, he may not also be able to save for a rainy day.

Borrowers from the low income group, who take small loans, would suffer badly. Ironically, the tax liability of the rich will come down, thus killing the basic principles of taxation.

On the economic front, it has already been noticed that high-end property may not drive the construction sector, only the affordable housing sector can.

Thus, if tax sops are removed on home loan repayments, the construction sector will also suffer badly.

In view of the above facts, it is hoped that the tax mandarins will realise the repercussions of removing tax sops and retain the income tax incentives that are presently available on home loan repayments.


(The author is a Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail. com.)