hindu.com,Saturday, Aug 22, 2009

The Rs.1.5-lakh limit for housing loan interest exemption is an attractive option for the salaried class. BIJU GOVIND looks at the scenario when this benefit will be taken away with the implementation of the new tax code.

How will the realty sector be impacted by the new tax code proposed by the Union government? Will the generosity seen in respect of the income slabs for the salaried class lead to any negative factors for property developers and buyers? These are some of the questions that have come up after the code was unveiled last week.

Bankers and builders have positive views about the tax code, but they are sceptical about the absence in it of the existing income-tax exemption of housing loan interest payments up to Rs.1.5 lakh annually. Borrowers will have to spend more for tax payment as well as the equated monthly instalment (EMI), many say.

As of now, the tax for individuals having annual incomes up to Rs.1.6 lakh is nil. It is at the rate of 10 per cent of incomes between Rs.1.6 lakh and Rs.3 lakh; 20 per cent between Rs.3 lakh and Rs.5 lakh; and 30 per cent for Rs.5 lakh and above.

The code, which will replace the Income Tax Act in 2011, proposes to tax incomes between Rs.1.6 lakh and Rs.10 lakh at 10 per cent. The tax liability will be Rs.84,000 plus 20 per cent of the total yearly income for incomes exceeding Rs.10 lakh but below Rs.25 lakh. In addition, the tax liability for those having incomes above Rs.25 lakh will be Rs.3.84 lakh plus 30 per cent of the total income.

However, savings up to Rs.3 lakh of a salaried person will be exempted from income tax. The existing limit is Rs.1 lakh under sections 80C, 80CCC and 80 CCD of the Act. "The Rs.1.5-lakh limit for housing loan interest exemption is an attractive option for the salaried class. The Centre should continue with it to increase the flow of funds into property investments. Otherwise, the proposal will be counterproductive," says Nityanand Kamath, president of the Confederation of Real Estate Developers Association of India (CREDAI) Kozhikode chapter.

A salaried person whose yearly income is between Rs.4 lakh and Rs.5 lakh will be forced to think twice before going for a housing loan. A person whose annual income is Rs.4.5 lakh and has taken a housing loan of Rs.9.5 lakh now gets Rs.1 lakh exempted from his gross salary. The individual also gets an exemption of nearly Rs.1 lakh under sections 80C, 80CCC and 80CCD.

That means he will be taxed only for Rs.2.5 lakh of his income, at 10 per cent.

He will not get the benefit of the Rs.1 lakh interest exemption when the code comes into effect. After considering the benefits under other categories of deduction, the gross salary will be calculated at Rs.3.5 lakh. The individual will then have to seek ways to increase savings from the existing Rs.1 lakh to Rs.3 lakh. "But that will not be possible for a person with a low income because he will have to pay the EMI," says K.K. Ajithkumar, Assistant General Manager, Federal Bank Ltd.

At the same time, a person who has not taken a housing loan will have a wider choice of savings on account of the Rs.3 lakh limit. Thus, the individual who has taken a housing loan will have to pay more taxes than others with equal income who have not taken a housing loan.

Many believe that the proposal will be detrimental to the policy of affordable housing in the country. The government will have to do a rethink on the proposal before it intends to introduce the Bill on the tax code in the winter session of Parliament.

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