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Tax benefits on housing loans may stay

By Alok Mukherjee

NEW DELHI FEB. 20. The coming budget is unlikely to drastically alter the current tax benefit that is applicable to housing loans, the strong economic logic against it forwarded by the Kelkar Committee notwithstanding.

There are three reasons for not expecting drastic changes in the benefit. First is the strong opposition from within the BJP itself. Second, the repeated assertions by the Union Finance Minister, Jaswant Singh, that housing, along with tourism and textiles, needs encouragement, as it provides employment opportunities and a fillip to cement and steel industries and a host of other ancillaries. Finally, the principle of keeping a Government promise, based on which many people have gone in for housing loans.

The Kelkar report on direct taxes does make a case for withdrawing the huge benefit that has been accorded to people going in for housing loans. From the assessment year 1987-88, a small amount of Rs 5,000 towards interest on borrowed capital for owner occupied property was allowed for deduction while calculating the tax liability. Then, in 2001-02, the permissible amount was raised significantly to Rs. one lakh and subsequently to Rs 1.5 lakhs annually in the last budget.

According to the Kelkar Committee, this incentive is in the nature of a tax subsidy which benefits only the taxpaying owners and not those who are out of the tax bracket. Secondly, even among the taxpaying house owners, this facility bestows relatively higher tax relief to those with higher incomes since they are subjected to a higher marginal rate of tax.

That this tax relief has facilitated house construction tremendously is not in doubt. During 2001-02, some 4,41,000 people sought housing loans worth Rs 14,811 crores. But in most cases, the beneficiaries had sought loans below Rs 5 lakhs, their percentage being 85 per cent of all loanees. Another 11 per cent took loans between Rs 5 lakhs and Rs 10 lakhs while only four per cent took loans above Rs 10 lakhs.

Data obtained from housing finance companies revealed that the average loan of the 85 per cent loanees was Rs 2,32,661 on which the annual interest burden works out to Rs 25,000. Since there is virtually no income tax on annual incomes up to Rs 80,000, many of these loanees might not be paying any tax and therefore, do not get any benefit. On the other hand, the balance 15 per cent who have sought loans above Rs 5 lakhs have an average annual repayment burden of Rs 75,000 to Rs. 1,60,000 and the Kelkar Committee's point is that those who can afford to pay such high annual repayments obviously fall in the high income category and are enjoying tax subsidy, whereas subsidy on food and kerosene are being cut.

Consequently, the suggestion that this incentive be abolished and instead an interest subsidy of two per cent be provided on all housing loans below Rs. 5 lakhs, irrespective of the tax paying status of the loanee. The second alternative proposed by the committee is that the present incentive be continued for owner-occupied houses but with a ceiling on interest deductible for taxable income purposes at Rs. 50,000.

The Institute of Chartered Accountants of India has supported the Kelkar Committee on the second suggestion. It wants the deduction to continue but with a restriction of Rs. 50,000.

But the moot point remains before the Government — can it go back so soon on its promise which has led many people to make an investment decision? The Kelkar Committee refers to a number of Supreme Court judgments where the court has upheld that in the realm of tax policy, the principle of promissory estoppel does not hold and the State can change tax policies in the public interest. Mr. Singh now has the choice before him — and also to decide what is in public interest which would be commensurate with his party's political interests.

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