A fall in home loan rates since last September as well as a few provisions in the Union Budget 2016-17 are working in favour of the home buyers, says Rajiv Raj
The annual budget is eagerly awaited by one and all, be it the home maker, those dealing in stocks and shares or a corporate honcho. The changes in existing norms and introduction of new rules have the capacity to impact an individual's life, the stock markets and the entire economy as well.
In the Union Budget 2016-17, finance minister Arun Jaitley announced some changes which can pep up the home buyers especially the first time buyers, thereby adding a cheer to the entire real estate market.
So what is the good news?
As per the new provisions proposed in the current budget, a deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year is allowed, provided the value of the house does not exceed Rs 50 lakh. This is proposed only for first time home buyers. As per the existing norms those who have a home loan can claim interest repayment as tax deductions; this limit for self occupied houses is Rs 200,000.
Thus a first time home buyer can now get maximum deduction of interest on housing loan up to Rs 250,000 that includes Rs 2 lakh under Section 24(b) and Rs 50,000 under section 80EE of the IT Act. The portion of the EMI which goes towards repayment of the principal can be claimed under Section 80C within the total limit of Rs 150,000 of Section 80C.
As per the current provision, interest payable on capital borrowed for construction of a house property is deducted while computing income from house property. A deduction of Rs 2 lakh is allowed if the construction is completed within three years from the end of the financial year in which capital was borrowed. Now the time limit has been increased from three to five years from the end of the financial year in which the capital was borrowed.
Another proposed change that could benefit home buyers is that service tax will not be imposed on those developers who are providing affordable housing, which are, unit sizes not exceeding 30 square metres (323 square feet) in bigger cities and 60 square metres (646 square feet) in smaller cities.
So why should you buy a house post budget 2016-17?
Last September the repo rates were reduced which prompted banks to lower the lending rates thereby creating a favourable environment for home loan seekers.
Also, the additional benefit is available for the interest portion repaid each year and this could amount to considerable tax savings especially for those in the higher tax bracket.
For those of you who are wondering if this is really beneficial, let's talk numbers. Those falling in the 30.9 per cent tax bracket could end up saving Rs 15,450 per annum; those in 20.6 per cent save Rs 10,300 per annum and those in 10.3 per cent bracket could make a yearly saving of Rs 5,150.
Each EMI that is repaid has a principal and an interest component. As the years progresses the interest part of the EMI keeps reducing and the principal part keeps increasing. Thus this advantage is available to the borrower (considering the rules remain same) till as long as the interest component of the EMI exceeds Rs 250,000 annually which will definitely be so for a couple of years depending on the loan size. This could bring a huge saving for all tax payers for a considerable number of years.
However this change will majorly benefit only those looking at buying houses in non-metropolitan cities as the cost of the house should not exceed Rs 50 lakh and finding a house in that budget in a metro is almost impossible.
Another change that pertains to under construction houses can also provide relief to buyers who have taken a loan for an under construction property which is delayed, but yet they have to continue to pay the EMI without being able to live in it. The relief on service tax could help those looking for affordable housing.
The above changes could nudge a home buyer sitting on the fence towards buying a house. Having said that giving due weightage to all aspects is important before buying a house.
Photograph: See-ming Lee/Wikimedia Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.