To encourage first-time home buyers, the Union Budget has proposed an additional Rs 1 lakh interest deduction from their gross total income on loans up to Rs 25 lakh.
Given the Rs 25 lakh loan limit for getting the additional interest deduction benefit and the high property prices in most of the metros and urban areas, first-time home buyers will be able to buy houses only on the fringes of metros/urban areas, semi-urban and rural centres.
In his Budget speech, Chidambaram proposed that a person taking a loan for his first home from a bank or a housing finance corporation (HFC) up to Rs 25 lakh from April 1, 2013 to March 31, 2014, will be entitled to an additional deduction of interest of Rs 1 lakh.
The additional deduction will be over and above Rs 1.50 lakh deduction allowed for self-occupied properties under Section 24 of the Income-Tax Act. If the limit is not exhausted, then the balance may be claimed in assessment year (AY) 2015-16.
Chidambaram hopes that the additional interest deduction benefit will promote home-ownership and give a fillip to a number of industries such as steel, cement, brick, wood, glass, and so on, besides jobs to thousands of construction workers.
Priority sector tag
Banks and HFCs may be encouraged to lend to those borrowing up to Rs 25 lakh for buying a house as such loans get the priority sector lending tag. Loans to agriculture, micro and small enterprises, education, housing and weaker sections come under the priority sector lending category.
According to Reserve Bank of India, loans to individuals up to Rs 25 lakh in metropolitan centres with population above 10 lakh and Rs 15 lakh in other centres for purchase/construction of a dwelling unit per family are classified as priority sector lending.
R.V. Verma, Chairman and Managing Director, National Housing Bank, said the fiscal incentive of additional Rs 1 lakh deduction on account of interest paid by a home loan borrower will spur demand for housing.
Assuming a loan-to-value ratio (the amount of loan taken divided by the value of property) of 70 per cent and a loan of Rs 25 lakh, a home buyer, who has savings and recourse to other sources of borrowing to stump up margin, will be able to buy a house worth around Rs 36 lakh.