Tax sops on home loan repayment may end

MUMBAI: Home loan providers are preparing themselves for the eventuality of phasing out tax breaks on repayment of the principal amount of home loans.

While the highly sensitive issue of tax breaks on interest payments up to Rs 1.5 lakh a year may be untouched, there is a likelihood that benefits under Section 88 of the Income Tax Act may not be available for the full term of the loan.

At present, a borrower can avail of income tax rebate up to Rs 20,000 under Section 88 of the Income Tax Act against repayment of principal amount of a housing loan for the entire term of the loan, irrespective of whether it is for five or 30 years.

According to banking circles, such a move will not affect the mortgage market, since the main driver of housing loans has been the tax break on interest payment on home loans.

“Very few countries provide tax breaks on repayment of principal in a housing loan. In most places, tax breaks are given only for repayment of interest,� said an industry official.

Source said that the Section 88 benefit may be available for only a few years. This will have a limited impact because though the overall limit for investments under this Section is Rs 1 lakh (including infrastructure bonds), the tax breaks on repayment of principal are restricted to Rs 20,000.

The housing industry gets a host of direct and indirect tax benefits in the budget. The tax breaks are available to buyers under Section 24 and Section 28 for lenders, companies investing in housing projects and housing finance companies.

Two years ago, the Kelkar committee constituted by the NDA government had suggested that tax breaks on interest repayments should be withdrawn. However, the suggestions met with a public outcry and were later withdrawn. u

Even some advanced countries have found it difficult to take away the tax benefits associated with repayment of principal. The US introduced it in the 1980s and has continued with it.

In India, the tax breaks have triggered a home loan boom, with commercial banks stepping into the business, which till recently, was the domain of housing finance companies. In the past two years, home loans have emerged as the fastest growing asset in several banks.