My friend, Ajay, called the other day and excitedly told me the under-construction flat that he had bought in 2007 was finally delivered.
The builder had promised to deliver the flat in 2010. Ajay was extremely happy that he would, at last, be able to move into his dream home.
What had added to his happiness was the fact that he would be able to claim the enhanced interest deduction of Rs 2,00,000 for the year as well.
This is when I had to sadly puncture his happiness. I told him that given his facts, the maximum deduction of interest he was eligible for was only Rs 30,000 and not the new limit of Rs 2,00,000.
He refused to believe till I explained to him that as he had taken the first loan disbursement in the financial year ending March 31, 2008, and the house was not completed by March 31, 2011, the increased limit of Rs 2,00,000 was not applicable to him and the maximum deduction in his case would be Rs 30,000.
He cross checked the facts with his tax advisor, who confirmed this.
Ajay wondered why he, a home buyer, was being penalised for a delay that was not his fault in the first place and because of which he had already suffered huge loss.
To add insult to injury, his tax deduction was being severely curtailed. That set me wondering, too.
Why was this seemingly unfair provision put in the Income Tax Act in the first place?
The limit for deduction of interest payable on a loan taken to acquire a self-occupied property was Rs 30,000 without any other conditionality till 1999.
This restriction for completing construction was first put into place by the Finance Bill of 1999, which raised the limit for deduction of interest on a loan taken for a self-occupied property from Rs 30,000 to Rs 75,000 but only for those completed before March 31, 2001.
This increase in limit was subsequently enhanced to Rs 1,00,000, Rs 1.50,00,00 and finally to Rs 2,00,000 by the latest Finance Bill, with the restriction on construction period being adjusted from time to time.
The limit for unconditional deduction has been kept at Rs 30,000 all along. I studied the explanatory memorandum to each of the Finance Bills that put in the construction period restrictions but none mentioned any specific reasons for these restrictions.
The only speculation I can make for this seemingly unfair restriction was that till only a few decades ago self-construction of houses was the norm rather than the exception it is today and the tax authorities wanted to encourage people to build their house quickly, rather than buy a plot of land and keep it vacant to speculate on land prices.
I don't think they envisaged that more than 70 per cent of home loans would be given out for acquiring under-construction properties from independent developers.
At that time, it might have been difficult for them to envisage that delays would be endemic to the whole building process, mostly because of delay in approvals from the government authorities themselves, as well as fund shortage for the developers.
At that time, nobody would have thought a construction period of three to four years would be grossly inadequate.
As a result of this lack of understanding, the home buyers are hit by a double whammy.
They have to pay pre-EMI (equated monthly instalment) interest during the construction period for long periods and this pre-EMI interest enjoys no deduction at that time.
Then the total limit for deduction is restricted to Rs 30,000 a year if the construction period exceeds four years, which again has unfortunately become the norm rather than the exception nowadays.
The only reason it has not become a big issue till now is that tax returns do not capture information about construction periods.
Hence, most home buyers are going ahead and claiming the enhanced deduction, blissfully unaware that they will be liable for penal interest if their income tax returns be opened for detailed scrutiny.
Luckily for them, most tax returns are nowadays accepted as filed and even when opened for scrutiny, most assessing officers are equally unaware of this restrictive provision.
This happy state of affairs cannot last for long, given the huge collection targets that the tax department has.
It would be in the fitness of things that the tax law is amended to remove this unnecessary restriction on construction period or at least be appropriately amended to make such restrictions apply only when the tax payer is doing self-construction.
Till that is done, the least all home buyers like Ajay can do is be aware of these tax provisions and make sure they buy properties either ready to move in or at least at a stage such that the completion will not exceed the three-year period.
