Union Budget 2013: Home truths — big is bitter, small is better

NEW DELHI: Small is beautiful and now, more affordable too. Big is, well, taxing. In order to promote home ownership, finance minister P Chidambaram has proposed an additional deduction of up to Rs 1 lakh on interest if a person buys his first house with a loan of up to Rs 25 lakh from a bank. The value of the property should not exceed Rs 40 lakh. This benefit will be applicable for the 2013-14 financial year only.
Though the loan cap of Rs 25 lakh will not be very attractive in metro cities, it will meet the requirement of most home buyers in small cities. The additional deduction will take the total deduction against interest payment on home loan to Rs 2.5 lakh. This will reduce the interest burden substantially.
Take, for example, a person in the 30% tax bracket who has availed a home loan of Rs 25 lakh. The tax payment will be around Rs 2.5 lakh a year at 10% interest rate. This entire amount will be deducted from his income. Because of this, his tax bill will be lowered by Rs 77,250, including the education cess. If this benefit is included in the interest payment, the net interest liability is Rs 1,72,750. Therefore, the effective tax rate for the home buyer will be around 7% instead of 10%. If the borrower’s income is in a lower tax bracket, the benefit will be less.
The affluent home buyer, on the other hand, will take a hit. The Budget has proposed a TDS of 1% on the value of the transfer of immovable property, where the consideration exceeds Rs 50 lakh. The move is aimed at improving the reporting of such transactions and increasing the collection under capital gains tax. But, an expert said if one sells a house to buy another, his capital gains tax liability becomes zero. But, if he now pays the TDS, he will have to wait for the refund.
The Budget also proposed to lower the abatement from 75% to 70% for high-end homes and flats. Chidambaram said homes and flats with a carpet area of 2,000 sq ft or more or of a value of Rs 1 crore or more are high-end construction where the component of service is greater. This will increase the service tax substantially. For a house of Rs 1 crore, at 70%, the service tax liability will increase to Rs 3.6 lakh from the present Rs 3 lakh.
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