Income tax benefit on home loan under affordable housing explained

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Home loan interest rates coming down to the tune of around 7 per cent (SBI home loan interest rate starts at 6.70 per cent per annum) is good news for home buyers as it would lead to lower monthly EMI. However, if a home buyer is buying unit, which is priced below 45 lakh, then he or she would be able to claim an additional 1.5 lakh income tax exemption on home loan interest payment under Section 80EEA. This income tax benefit will be given in addition to 2 lakh home loan interest payment under Section 24(b) of the income tax act 1961. However, the question is, will the new affordable home loan borrower will be able to claim income tax exemption to its maximum limit of 3.5 lakh? According to tax and investment experts, the answer is ‘no’ as 45 lakh upper limit cap on home loan amount doesn’t allow a new home loan borrower to claim the maximum 3.5 lakh exemption limit at current home loan interest rates regime.

Home loan EMI calculation

Highlighting the mismatch between 45 lakh home loan upper limit in affordable housing and current home loan interest rates Amit Gupta Co-founder & MD at SAG Infotech said, “To take advantage of the tax benefit to the fullest i.e. 3.5 lakhs, it is necessary for the home buyers to take 90 percent loan on a residential property that is valued at 45 lakh for a period of 20 years at the interest rate of 9 per cent. Then only the new home loan borrower will be able to use up completely the limit of 3.5 lakh deduction.”

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The Managing Director of the SEBI registered income tax solution provider company went on to add, “The prevailing rates of home loans mirror the other picture — the present interest rates for affordable housing are nearly 7 per cent or less i.e. about 200 basis points lower than 9 per cent that is the requirement of affordable housing. Consequently, the home buyer cannot use up completely the permissible limit of the income tax concession.”

What’s the solution

Highlighting upon the solution required Kartik Jhaveri, Director — Wealth Management at Transcend Consultants said, “The idea behind giving an additional 1.5 lakh income tax benefit under Section 80EEA was to support the Indian housing sector by fueling demand for affordable house. The idea has worked to some extent too but the new home loan borrower needs to understand that lower home loan may result in faster repayment of the principal as lower home loan EMI would allow them to keep the tenure of the loan lower may be 15 years instead of traditional 20 years. They should also remember that the lower home loan regime is not going to last for long and hence for that much time, the Government of India should think of increasing the 45 lakh affordable home loan limit so that the loan borrowers get maximum benefit of this lower home loan interest rate scenario.”

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