Interest on Loans for New Houses

[CA DEV KUMAR KOTHARI]

Budget 2013.

ONE TIME DEDUCTION FOR FIRST TIME BUYER OF RESIDENTIAL HOUSE PROPERTY- a shift from LTFP to very STFP.

Long-term Fiscal Policies vis a vis very short term policies:

Author recall that concept of Long-term Fiscal Policies (LTFP) was introduced by the GOI in 1985 to meet the commitment given in Budget speech for 1985-86. Some of purposes announced for the LTFP included as follows:

 

---

 

Long Term Fiscal Policy

For the first time in India’s history the Government formally presented a Long Term Fiscal Policy (LTFP) to Parliament on December 19th, 1985. In doing so, the Government fulfilled the commitment given in the Budget speech for 1985-86. The LTFP, which has been conceived as an instrument to serve the basic objectives of the Seventh Plan, marks a new approach to fiscal management of the economy.

Important benefits are anticipated from this explicit long term perspective to the framing of fiscal policy. It is expected to impart a definite direction and coherence to the sequence of annual budgets and this should bring about a greater degree of predictability and stability in the economic environment. Second, the LTFP will accord a greater role for rule-based fiscal and financial policies and less reliance on discretionary, case by case administration of physical controls, an evolution in economic management demanded by our increasingly complex economy. Third, the LTFP will facilitate effective co-ordination of different dimensions of economic policy. Finally, the LTFP is expected to strengthen the operational linkages between the fiscal and financial targets of the Seventh Plan and the annual budgets.

 

---

 

It seems that now-a-days GOI is many times relying on very short-term fiscal policies. Some of examples of very short-term fiscal policies are long-term infrastructure bonds allowed in AY 2011-12 and 2012-13. In the Budget proposal for 2013-14 also we find some very short-term provisions. For example proposed tax rebate u/s 87A and deduction of interest to individuals who buy first time residential house property.

The rebate was discussed in article written by author and webhosted on this website. The deduction for housing loan is discussed in this article:

The relevant clause of the Finance Bill 2013 and notes thereon read as follows (with highlights added in red colour):

Insertion of new section 80EE. Deduction in respect of interest on loan taken for residential house property.

13. After section 80E of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2014, namely:—

‘80EE. (1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property.

(2) The deduction under sub-section (1) shall not exceed one lakh rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2014 and in a case where the interest payable for the previous year relevant to the said assessment year is less than one lakh rupees, the balance amount shall be allowed in the assessment year beginning on the 1st day of April, 2015.

(3) The deduction under sub-section (1) shall be subject to the following conditions, namely:—

(i) the loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2013 and ending on the 31st day of March, 2014;

(ii) the amount of loan sanctioned for acquisition of the residential house property does not exceed twenty-five lakh rupees;

(iii) the value of the residential house property does not exceed forty lakh rupees;

(iv) the assessee does not own any residential house property on the date of sanction of the loan.

(4) Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment year.

(5) For the purposes of this section,—

(a) “financial institution” means a banking company to which the Banking Regulation Act, 1949 applies including any bank or banking institution referred to in section 51 of that Act or a housing finance company;

(b) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes.’.

Notes on clauses reads as follows:

Deduction in respect of interest on loan sanctioned during financial year 2013-14 for acquiring residential house property

Under the existing provisions of section 24 of the Income-tax Act, income chargeable under the head ‘Income from House Property’ is computed after making the deductions specified therein. The deductions specified under the aforesaid section are as under:-

i. A sum equal to thirty per cent of the annual value;

ii.Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.

It has also been provided that where the property consists of a house or part of a house which is in the occupation of the owner for the purposes of his own residence or cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, then the amount of deduction as mentioned above shall not exceed one lakh fifty thousand rupees subject to the conditions provided in the said section.

Keeping in view the need for affordable housing, an additional benefit for first-home buyers is proposed to be provided by inserting a new section 80EE in the Income-tax Act relating to deduction in respect of interest on loan taken for residential house property.

The proposed new section 80EE seeks to provide that in computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property.

It is further provided that the deduction under the proposed section shall not exceed one lakh rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on 1st April, 2014 and in a case where the interest payable for the previous year relevant to the said assessment year is less than one lakh rupees, the balance amount shall be allowed in the assessment year beginning on 1st April, 2015.

It is also provided that the deduction shall be subject to the following conditions:- (i) the loan is sanctioned by the financial institution during the period beginning on 1st April, 2013 and ending on 31st March, 2014; (ii) the amount of loan sanctioned for acquisition of the residential house property does not exceed twenty-five lakh rupees; (iii) the value of the residential house property does not exceed forty lakh rupees; (iv) the assessee does not own any residential house property on the date of sanction of the loan.

It is also provided that where a deduction under this section is allowed for any assessment year, in respect of interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provisions of the Income-tax Act for the same or any other assessment year.

It is also proposed to define the term “financial institution”.

This amendment will take effect from 1st April, 2014 and accordingly apply in relation to the assessment year 2014-15 and subsequent assessment year.

[Clause 13]

The short term petty deduction:

We find that the petty deduction of Rs. One lakh is allowed only once with relaxation that it can be spread over two years, if in the FY 2013-14 full deduction of Rs. One lakh could not be availed.

I call this a petty deduction, because considering the purpose of allowing such deduction that is to encourage housing , the totally restricted deduction of Rs. One lakh is petty.

Furthermore, as per proposed provision duly explained, if a person claims deduction under the proposed section, he will not be entitled to claim deduction under any other provision in any of the year. If so, any one will avoid availing deduction under proposed section, because one a deduction is claimed the claimant shall not be entitled to claim deduction in respect of interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provisions of the Income-tax Act for the same or any other assessment year. There seems some drafting error, the restriction should be that deduction under any other provision shall not be allowed to the extent of interest claimed under the proposed section so that double deduction cannot be claimed.

Nature of eligible loan- seems a drafting error:

On reading of sub-section (1) we find that interest payable on loan taken from any financial institution is covered.

In sub-section (5) we find definitions of financial institution as well as housing financial company. These two meanings are not without any purpose. It seems that interest on loan taken from financial institution as well as housing financial company are intended to be eligible loans. Therefore, proposed sub-section (1) need to be corrected to include housing financial company also.

 Drafting error should be removed the provision should be made long-term:

The proposed section should be reviewed carefully and drafting errors should be rectified. Considering the purpose of the deduction that is “Keeping in view the need for affordable housing, an additional benefit for first-home buyers is proposed …., the deduction should be made long-term. That is it should continue till the loan taken for the first house is repaid.

The deduction should also be allowed to buyers of more than one residential house, provided the house so purchased is let out for residential purposes. Provision of deduction in relation to residential house for letting out will enable to achieve the purpose of affordable residential housing by improving supply of residential houses at affordable rent. This will also create demand for construction material and economy will get a boost by more capital expenditure on construction of residential houses.