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Why home loan deductions make sense

In India, owning a house is still a distant dream for a vast majority of the population. In fact despite the current economic boom and increase in salary levels, relatively a very low percentage of the overall population owns a house property.

business Updated: Jan 31, 2010 22:43 IST

In India, owning a house is still a distant dream for a vast majority of the population.

In fact despite the current economic boom and increase in salary levels, relatively a very low percentage of the overall population owns a house property. Interest deduction on housing loan and deduction for repayment of principal amount of the housing loan under the Income-tax Act, 1961 have indeed encouraged many individuals to take housing loan and buy a house property.

Many a time, a small relief under the tax law could have far-reaching impact in many identified as well as non-identified areas; housing loan deduction is one of these.

Individuals

It is pertinent to note that ease in availability of housing loan for individuals has been one of the key reasons for individuals, especially salaried employees, to invest in house property.
Till a few decades back, a person used to buy a house property generally towards the middle of his career. Many a time
it would be even close to retirement age, by when he had accumulated a large amount of funds.

For the last decade or so, this scenario has changed, and many salaried employees have, early in their careers, come forward to buy house property as the equated monthly installments (EMIs) could be easily structured and because of the two important tax benefits available under the income tax laws.

The first is a deduction of upto Rs 1.5 lakh that may be claimed for interest paid on housing loan for a self-occupied house property subject to fulfillment of specified conditions.

The second condition: a deduction up to Rs 1 lakh may be claimed under Section 80C of the Income Tax Act for the repayment of the principal amount of the loan.

Further, the interest deduction on the housing loan could be adjusted against the tax payable on salary income.

Therefore, there is a case to continue and even increase the deduction for interest on housing loan to say Rs 3 lakh in the Budget 2010 and for repayment of housing loan to Rs 2 lakh.

Industry

From the industry's perspective, construction/realty industry is known to provide direct employment to millions of individuals. Many of these include unskilled labour which is primarily dependent upon construction and related industries for a gainful employment. Further, a boost in construction also leads to employment opportunities in other sectors including cement and steel industries which also contribute to the overall growth and development of the economy.

Government

Even though, there would be a loss to the Government in terms of the direct personal tax collection due to increased deductions, however, this loss in revenue is likely to be off-set by increase in direct as well as indirect tax collection resulting from increase in economic activity in realty and associated industries in near future. In this context following points merit attention.

More employability would ultimately result in more personal tax collection or even otherwise would at least result in more income, savings and consumption wherein a large population including labour would demand goods and services in the market, which in turn would trigger demand of basic goods and services.

Further, increase in activity in the realty, cement, steel and other industries, would result in increased corporate income and thereby increased corporate tax collection. Also, increase in number and volume of financial transactions would also provide stimulus to the banking/financial sector.
In the nutshell, a benefit provided to individuals on the housing loan interest deduction and repayment of the principal amount could actually have far reaching results in terms of demand and supply of goods and services which would more than off-set the revenue loss in near to mid term future. Therefore, there is a strong case to continue and enhance the deduction in respect of the housing loans for aam admi!

(The writer is the Executive Director of KPMG)