Separate section needed for home loan payments: Adhil Shetty

After an incredibly tough year, there are high expectations from this year’s Union Budget.

Measures that will put more disposable income in the hands of the common man and boost economic sentiment would be most welcome.

I would like to see a new section being created in the Income Tax Act to provide enhanced, comprehensive deductions against home loan payments.

Here are my justifications:

Too Many Sections Right Now

Currently, home loan payments can be claimed as deductions under multiple sections: Rs 1.5 lakh for principal paid under Section 80C, Rs 2 lakh for interest paid under Section 24B.

For eligible borrowers, there can be further deductions of either Rs 50,000 under Section 80EE or Rs 1.5 lakh under Section 80EEA.

Also, crunching the numbers on 80EEA reveals that it is highly unlikely that most taxpayers can claim full value due to the inherent restrictions.

Therefore, these sections need to be streamlined into a single section which allows a total deduction of up to Rs 5 lakh on home loans without sub-caps on principal and interest.

Necessary For Higher Disposable Income

Home buying can be extremely costly, especially in urban areas where buyers often get over-leveraged and face income strain due to the large home loans they take.

The average home loan disbursed by BankBazaar in 2020 was Rs 26.67 lakh. Repaying large loans leaves very little income in hand for the borrower.

What also rankles is the fact that borrowers don’t get full value for their loan payments in the form of tax deductions.

For example, at the start of a home loan, a borrower may easily overshoot the Rs 2 lakh limit provided by Section 24B and not get value for the interest he is paying over and above this limit.

Having to take large loans is a necessity. Therefore, a single tax deduction for home loans with an enhanced limit would free up more income for taxpayers. This would, in turn, boost discretionary spending, which would stimulate the economy and fast-track its revival after the pandemic.

80C Has Got Too Crowded

Section 80C is one of the most popular tax-saving sections of the Income Tax Act because it provides too many options.

The plethora of options also means that urban taxpayers are unable to derive full value from the several necessary expenditure and investments they must make under this section.

A salaried tax-payer with a home loan and children will pay his loan principal, life insurance premium, PF contribution and school tuition fee.

He is therefore likely to overshoot the Rs. 1.5 lakh limit easily.

Therefore, home loan principal deduction should be removed from 80C and moved into its own section.

Current Sections Discriminate Against Repeat Buyers

Only eligible first-time homebuyers can avail Sections 80EE and 80EEA.
Here’s the problem with such restrictive sections: they discriminate against repeat homebuyers who upgrade to bigger homes out of necessity.

First-time buyers often make compromises due to budgetary limitations.

However, as their families get larger and their incomes grow, they may be able to upgrade to bigger homes. This brings the double whammy of having to borrow large again and not getting full value for tax deductions and being disallowed the additional benefits of 80EE and 80EEA. Therefore, a single section dedicated to home loans with an enhanced limit without the sub-caps would ease the burn to a degree.

Lastly, real estate is a priority sector. We have seen that this sector has a multiplier effect on the economy due to the large-scale creation of jobs.

A new home loan section with enhanced limits would not only increase disposable income but also stimulate interest in construction.

After a year like 2020, these are necessary to revive India’s economy.

The writer is CEO, BankBazaar.com