Changes required in Income Tax law to benefit homebuyers; check what experts think

The real estate growth in India has been sluggish for quite some time though the government has been pro-active with its efforts to revive the sector. The Narendra Modi government reduced GST rates and attempted to rationalise these rates on residential units. For the affordable housing segment, it reduced the GST rates to as low as 1 per cent and for non-affordable housing, the GST rates have been brought down to 5 per cent from 12 per cent. The Modi government also expanded the scope of the benefit of tax exemption available to the developers, with respect to projects in the affordable housing segment. Nevertheless, there is scope for more measures, especially for individual taxpayers.

Speaking on the separate deduction for repayment of housing loans, Balwant Jain, a Mumbai-based tax and investment expert said, "With prices of houses increasing and the huge amount of EMIs to be serviced, it is logical and rational that the government carve out the deduction for home loan repayment from Section 80C of the Income Tax Act and introduce it as a separate section, to allow an exclusive deduction for home loan repayment. This will certainly incentivise home buyers, especially the millennials, to buy residential houses and avail of the exclusive tax benefits."

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Presently, under Section 80C of the Income Tax Act, individuals and HUFs are allowed to claim a deduction of up to Rs 1.50 lakhs for various items, including repayment of home loan taken for a residential house from specified institutions. Due to various items clubbed together in Section 80C, like Employees' Provident Fund (EPF), NPS, life insurance premium, school fee for children, NSC, PPF, etc., in many of the cases the meager limit of Section 80 C gets exhausted before any amount with respect to the home loan repayment can be claimed.

Speaking on rationalising the tax slabs and rebate under Section 87A, Balwant Jain added, "Presently, under Section 87A, an individual taxpayer is entitled to a rebate of up to Rs 12,500, in case the total income is below Rs 5 lakhs. Once this threshold limit is crossed, the taxpayer loses this rebate of Rs 12,500 fully, even in cases where the taxable income exceeds the threshold by just a few hundred rupees. This steep rise in tax liability by Rs 12,500, once the income crosses this limit of Rs 5 lakhs, induces many a taxpayer to manipulate and keep the income below Rs 5 lakhs, to avail of this benefit. This is especially so for the self-employed ones, who have the scope to manipulate the taxable income. Since the banks and housing finance companies lend on the basis of income of the applicant, such taxpayers are not able to get home loans of the amount that they otherwise would have been eligible for, had they disclosed their real income."

On what is required from the Income Tax Department to avoid such manipulation, Kartik Jhaveri, Director — Wealth Management at Transcend Consultants said, "In order to discourage such manipulation, the government can introduce the provision of granting marginal relief in such cases, so as to ensure the increased tax liability shall not exceed the amount by which the taxable income exceeds the threshold limit of Rs 5 lakhs. For example, if the taxable income of a person is Rs 5.05 lakhs, his tax liability presently comes to Rs 13,500, which exceeds the amount of Rs 5,000 (the amount by which the taxable income exceeds the threshold limit of Rs 5 lakhs). If the government introduces the benefit of marginal relief in such marginal cases, the tax liability, in this case, will not exceed the incremental income of Rs 5,000. Such relief would incentivise the individual taxpayers to offer full income for tax, in case the marginal income exceeds the threshold income by a few thousand only."