Finance minister P Chidambaram announced a number of sops for low-income homebuyers in the Union Budget for 2013-14.
However, for the affluent class, he increased the tax burden in acquiring a house. Experts and developers feel that these measures will increase the cost of houses in the NCR and other metro cities like Mumbai, Bangalore, Pune, and Chennai.
In order to promote home ownership, the finance minister allowed an additional deduction of interest up to Rs 1,00,000 from the taxable income if a person buys his first home, by taking a loan of up to Rs 25 lakh from a bank. The value of the property should not exceed Rs 40 lakh, and should be his first house.
That means, at the time of sanction of the loan, the assessee should not own any residential property. This facility will remain applicable for 2013-14 financial year only.
Though the cap of Rs 25 lakh on loan will not make it very attractive in metro cities, it will meet the requirement of most homebuyers in small cities.
Pankaj Bajaj, president of Credai NCR and MD of EldecoBSE 5.00 %
Infrastructure, said that the additional deduction of Rs 1 lakh on interest on a home loan
of up to Rs 25 lakh for first-time homebuyers is going to make home-buying a little easier for young people who are buying their first house in Tier II cities where prices are lower. "I don't expect it to have much of an impact in bigger cities where nothing is available in this price range," Bajaj said.
At present, deduction against home loan repayment is allowed up to Rs 1.50 lakh from a person's taxable income. This additional deduction of Rs 1 lakh will peg the total deduction against interest payment on home loan at Rs 2.50 lakh. This will reduce the interest burden substantially.
Take the case of a person whose income is in the 30% tax bracket who takes a home loan of Rs 25 lakh. On Rs 25 lakh home loan, the interest payment during a year will be around Rs 2.50 lakh at 10% interest.
This entire amount will be deducted from his income. Because of this, his tax bill will be lowered by Rs 77,250 including the education cess. If this benefit is adjusted in the interest payment, his net interest liability will be Rs 1,72,750. Therefore, the effective tax rate for the homebuyer will be around 7% instead of 10%. But if the borrower's income is in the lower tax bracket of 10% or 20%, the benefit accrued to him will be lower.
Sanjay Dutt, executive MD, South Asia, of Cushman & Wakefield, said that developers can take comfort from this provision as they will now be assured of genuine buyers in this category. However, they will have to ensure adequate supply within the price range, which is a difficult task, as they are faced with problems like high input costs of land, construction materials, labour and finances. Present opportunities for affordable housing are mainly in Tier II and III cities or on the outskirts of major cities, Dutt said.
Rakesh Yadav, the MD of Antriksh Group, said that the measure will help homebuyers in small towns but will not have much impact in big cities.