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Will housing take off? PDF Print E-mail
Friday, 10 February 2017 05:30
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Cap on tax-loss a dampener for those buying houses

 

Though finance minister Arun Jaitley has said he is against retrospective taxation, his decision to cap interest deductibles from house rent amounts to just that since those who have already bought houses on the basis of the deductions allowed under the current policy will be hit by the Budget’s proposals. In the past, if an individual took a loan of Rs 1 crore to buy a house and then let it out, he would pay annual interest of around Rs 10 lakh while earning around Rs 2.5 lakh as rent on the house – house rentals are typically 2-3% of the capital cost. This difference of Rs 7.5 lakh could be, under the law, treated as an income loss and set off against the income from salaries, say. So if a person earned Rs 24 lakh as salary, the taxable salary income would be Rs 16.5 lakh – since the tax burden will now be less, in effect, the effective interest costs on a new house fell to that extent -- the larger the loan, the greater the amount of reduction in tax burden.

 

Under the budget’s proposal, the Rs 7.5 lakh cannot be set off as a loss – the set off allowed will be capped on Rs 2 lakh, on a par with those living in the houses they have bought. Given rental returns from real estate are just 2-3% – it increases for commercial properties – compared to interest costs of 9-10%, the budget’s proposals considerably lower the attractiveness of property as an investment option. Setting off interest costs against rental incomes may be considered a sop today, but the policy was put in place by the government to encourage people to invest in houses because of the multiplier effect on both GDP as well as jobs creation – though tax consultants refer to this as the tax concession on the second house, it applies to even people who have bought just one house but do not live in it. While the budget has sops for the real estate sector – low-cost housing has been given infrastructure status – the final impact on growth will be determined by how many now find it unattractive to buy non-low-cost-houses due to the change in tax law. At a time when real estate is, in any case, slowing, it is not clear why the budget brought in this provision.

 

 

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