By: Anshumali Ruparel

The dust is fast settling on the euphoria about the income tax reliefs announced for individual tax payers in the Union Budget. The reality is gradually surfacing that there are neither queues for home loans nor a rush at the sales counters. The finance minister has been more cautious than generous.

“It is still too early to judge the impact of the Budget announcements. The benefits of the raised personal income tax ceiling come into effect only from the next financial year. While the implied savings may not be big enough to motivate home buyers directly, they will help create a more positive consumer sentiment,” says Shobhit Agarwal, MD, Capital Markets, JLL India, a real estate consultancy.

There are three main announcements in the segment of personal taxation which relate to property purchase. It is expected that home buyers with extra funds made available through these reliefs would go ahead and make purchase decisions. These reliefs are:

* The exemption limit up to which no income will be taxable has been raised from earlier Rs 2 lakh to Rs 2.5 lakh.

* The upper limit of deduction under Section 80C has been increased from Rs 1 lakh to Rs 1.5 lakh.

* The bar is raised for deduction of interest component in the home loan repayment amount from Rs 1.5 lakh to Rs 2 lakh.

“The aim is to save tax and make more disposable income available to individual tax payers to encourage them to spend or invest but there is no guarantee that it will flow the real estate way,” says Sushma Murthy, a Mumbai-based chartered accountant. “Besides, a salaried urbanite tax-payer is not looking at low-cost housing or budget homes, so other more attractive announcements regarding affordable housing do not impress or impact him,” adds Murthy.

However, tax planning can always begin this year. The quantum of tax that can be saved as an impact of these reliefs could be determined on the basis of the income tax-bracket the individual belongs to.

For example, under the tax bracket of 30 per cent, a tax payer may save a maximum of Rs 5,000 as per the first relief and maximum of Rs 15,000 each as per the next two reliefs. In all, he saves maximum tax of Rs 35,000 per annum as a result of the sops. Those in the tax-bracket of 20 per cent and 10 per cent would get tax-saving of maximum Rs 25,000 and Rs 10,000 respectively.

“Incentivising savings is a good growth driver but saving of Rs 10,000 to Rs 35,000 per year is not enough for the home buyer who is struggling to meet the rising prices of the residential properties across the country” says Naresh Mehta, a property consultant. “One must remember that due to these reliefs, income has not increased but one may have to show more income if one wants to save a few thousands in tax,” adds Mehta.

These reliefs are not aimed at the rich classes as there is no major change in the earlier tax-structure for very high income group having income of Rs 1 crore plus. On the other hand, the low income group has also not benefited as their income does not reach to the levels where they can avail of these reliefs. They are primarily aimed at the middle-income segment, the salaried class.

“Income of most Indians is between Rs 2 lakh to Rs 5 lakh per annum and every person has a dream to own his house which is now days possible only with the help of bank,” says Vimal Punmiya, an eminent chartered accountant based in Mumbai.

However, the case of Arif Saboo, a prospective buyer in Mumbai, illustrates the predicament buyers face even if salaries go up: the affordability gap widens.

“Last year, my salary was Rs 40,000 per month and I wanted to purchase a converted 2 BHK flat in Borivali for Rs 80 lakh. I had arranged for Rs 40 lakh from all my resources but the loan sanctioned was for only Rs 24 lakh as the EMI would have been around Rs 28,000. I could not buy,” says Saboo.

“This year, my salary increased to Rs 50,000. This time around I was sanctioned Rs 30 lakh as loan. I could have arranged for a bridge loan of Rs 10 lakh, but shockingly the price of the same flat now crossed Rs 1 crore. I am back to square one. What is the use of additional salary income of Rs 1,20,000 and the proposed tax savings of about Rs 15,000 when the property prices jumped by Rs 20 lakh duing the same period?” asks Saboo.

Those who have already purchased the flats with home loan are also not benefited much. “We have purchased an old 2 BHK flat in Tardeo in Rs 1 crore with the bank loan of Rs 45 lakh and the EMI is around Rs 56,000, i.e. Rs 6.70 lakh per annum. The annual principal component in repayment of home loan is Rs 2.20 lakh and interest component is Rs 4.50 lakh. So, the sops declared are of no use to us as we are anyway above the threshold limits,” said Nita Parekh, a prospective buyer.

“There is nothing decent and adequate available at good locations in any of the metros below Rs 1 crore. If your budget is small, then you either go on the outskirts or take an uncomfortably compact condo. Both are not workable for the mid-income working family,” adds Parekh.

“When you are qualified for a loan of Rs 50 lakh, it also indicates that your income bracket is around Rs 7 lakh to Rs 10 lakh per annum. Here these sops saving Rs 30,000 or Rs 35,000 tax in entire year or Rs 3,000 a month becomes irrelevant,” adds Murthy.

There is another problem with Section 80C as well. The salaried class will already have a few investments such as insurance and Public Provident Fund or Employees’ Provident Fund besides tax saving mutual funds etc. These have already consumed a lot of space under Section 80C deduction leaving little space for further investment or deduction. Currently, most of the Indian salaried tax-payers have exhausted their Section 80C limit so the relief of Rs 50,000 will only absorb the raise in the income and will not be of additional help.

The limit of Rs 1 lakh was set around a decade ago and the salaried class was demanding a raise in the bar since then. So, the finance minister has just satisfied them, not gifted anything. Since this amount is too less for buying a house, there is a possibility that it may get invested somewhere else.

It’s a difficult situation for the middle-income group. If one waits for the salaries to move, the property prices jump. If you want to exploit all three sops to the fullest, then one must be in the tax bracket of 30 per cent, which one is not.

If the sop is to be availed partially, one will have to show higher income and take a home loan. If the loan amount is very high, these sops are useless. If the loan amount is low, one has to manage the funds on one’s own, and if this is not possible, the shortfall in funds means the home purchase has to be deferred.

Punmiya shows a way. “If a property is bought in the name of say four or five members of the family jointly, then each of them can take advantage of these reliefs and the benefit could be significant.”

“There should be reduction in home prices and interest rates. One may expect a reduction in interest rates in coming years but a fall in property prices or renewal of housing demand in near future is wishful thinking,” adds Mehta.

The affordability gap is widening. Unless prices fall, which is itself unlikely, the impact of these reliefs on the residential markets will amount to nothing. The price rise effectively nullifies the sops given. Revival of mid-level housing sector with these sops looks like a far fetched theory.