Tax exemption to be raised to Rs 2.5 lakhs from Rs 1.5 lakhs

The government is taking some bold positive steps to boost the real estate sector. The tax exemption limit for the interest on a home loan may be raised to Rs 2.5 lakhs from the current Rs 1.5 lakhs in the upcoming budget. Besides this, the repayment of principal amount is part of investments eligible for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom house in big cities costs at least Rs 25 lakh. Considering a person takes a loan of Rs 20 lakh at an interest rate of 9.5%, he would pay Rs 1,88,493 towards interest alone in the first year. His annual interest payment in the first five years would be more than Rs 1.5 lakh. Hence a raise to Rs 2.5 lakhs would benefit the home buyers and be an impetus for growth of the housing sector.

If the exemption limit is hiked to Rs 2.5 lakh, then a person paying that much home loan interest in a year will save an additional Rs 31,000 in tax every year (WOW!!) . This saving of over Rs 2,500 a month would be significant for most borrowers, making home purchases more affordable. However, as per existing norms, the tax benefits start flowing in only after the construction of the house is completed, which usually takes 2-3 years in case of builder flats. The housing industry has urged the government to allow for the deduction as soon as loan repayment starts, as it would give substantial relief to home buyers and boost demand