 "How tax laws discriminate against 'homers'")
This is second in a series of articles on the existing tax laws dating from a past era, which now promote money laundering and also work against the common taxpayer.
The laws on taxability of income from house property date back to the 1960s, much before HDFC started the home loan revolution in India. At that time, individuals could not get loans to buy homes. These laws were amended piecemeal to accommodate the now easily available home loans but the basic structure discriminates against people who buy homes to stay in (let's call them homers).
Let's see the extent of discrimination against homers. Most people are aware a deduction is allowed for interest payable on a loan taken to acquire a house property. This deduction is limited to Rs 2 lakh for the homers (works out to a maximum loan of Rs 20 lakh at an interest rate of 10 per cent). Many homers pay far in excess of this limit, but their deduction is limited to Rs 2 lakh. This limit does not apply to people who give their flat out on rent (let's call them renters).
Today, rents are running at 1.5 per cent of the capital value. Since a 30 per cent deduction is available against rent, the taxable rent works out to one per cent of the capital value. The interest is 9.5 per cent, which means a renter will invariably get a net deduction of 8.5 per cent of the loan amount every year, giving him a major tax benefit. The homer has no taxable rental (the tax Act makes a song and dance about allowing it to be taken at 'nil'), so his loss is 9.5 per cent of the loan amount. This would be fine if only the overall limit was not applicable. Because of the limit, homers with interest payments larger than Rs 2 lakh lose out.
Tax planners have devised several schemes to turn homers into renters, while continuing to stay in their homes. The benefits from doing this can be enormous, as shown above. The fact that these schemes are legitimate can be gauged from the fact that many large public sector companies run these, called self-lease schemes, to turn homers into renters who stay in their own homes.
The discrimination against homers does not end here. Very few people are aware that should Homers take longer than three financial years to complete construction (after the end of the financial year in which the loan is first disbursed), the maximum limit is restricted to Rs 30,000. Most homers buy under-construction flats from developers, where the period of construction is not in their hands. The poor homer is not only stuck with the interest bill for the delayed period but the maximum limit of deduction is reduced to Rs 30,000 for no fault of his. The maximum limit also means most Homers are unable to take any benefit of allowing the pre-construction period interest as a deduction in five equal instalments after the construction is completed.
It is widely accepted that each joint owner can separately claim the limit of Rs 2 lakh. But, Section 26 of the income tax Act is clumsily drafted and it is only a matter of time before some smart target-driven tax official spots this anomaly in Section 26 to try and generate additional revenue from tax payers under his charge.
The maximum limit for interest deduction has been increased in small steps, with revenue constraints being cited as a major factor for not allowing full deduction. But, this discrimination against homers can be reduced without a serious dent in revenue collection. The loss from house property should be allowed to be set-off against other heads of income only for one property without any limit (whether own stay or rented) and the losses on other properties should only be allowed to be carried forward for setoff only against income from house property in future years. The loss that might occur due to the unlimited deduction on self-occupied property will be more than set-off by the savings on non allowance of the same year setoff of loss on multiple properties. As mentioned in my original article, the ownership of multiple properties allows money laundering as well as leads to revenue loss. Smart Homers are already claiming full deduction by using tax planning techniques. Why not officially make this available to all homers?
The writer is a Sebi-registered investment advisor
