DTC draft harsh on home loan deductions

The more things change, the more they remain the same!

After all the noise on the complete overhaul of the tax system, the draft direct tax code bill is really a re-hashed version of the earlier Act. Even the draft bill is still being worked upon and may change substantially by the time it is enacted as law and comes into effect from the year beginning April 1, 2012.

Here is a quick re-cap on what the DTC proposes for income from house property:
1) There is separate treatment of properties that are let out during the year and the ones that are not let out any time during the year.

2) Only properties that have been let-out for at least part of the year shall be taxed under the head “income from house property”. All other properties will not be taxed. The big change is that there are no more artificial calculations of rental income in respect of more than one self-occupied property as is the case with current tax laws.

3) From a common man’s perspective, the existing tax treatment continues for properties that are let out for any time during the year except that the standard deduction for repair and maintenance expenses has been reduced to 20% from 30% earlier. The language has also been considerably simplified in respect of co-ownership.

4) In respect of all properties that are not let out (which is what concerns most of us) there is a change in treatment. Now a consolidated deduction for interest payable on a loan taken to acquire, construct, repair or renovate such property/ ies will be allowed up to a maximum of RS1.5 lakh.
However, unfortunately, the language used in the proposed section 74 has left a lot of doubts about how this deduction will be calculated.

5) Unlike in the case of let-out properties the DTC requires—
a. That the home loan be taken only from a financial institution, thus ruling out deduction for interest payable even to employers or other loans from friends or relatives. Under the present law, there is no such condition of borrowings from financial institutions.
b. The impact of co-owned property and joint loans is not clearly stated.
c. The DTC draft makes no provision for deduction of interest payable on a home loan transferred from the first lender to the second lender.
d. It has a requirement of the completion of acquisition or construction within three years from the end of the financial year in which the loan was taken.
This provision exists in the current tax laws also for self-occupied properties but at least under the current laws even if you were unable to complete the acquisition or construction within the specified period, you would still get a deduction of `30,000. The change in provision was probably bought in to deny deduction of interest payable on a loan taken for speculation on real estate prices with no immediate intention to complete construction.
However in practice with quite a few cases of developers delaying projects, the consumer may be punished further with denial of deduction of interest for no fault of his. In fact, if a financial institution is providing a loan for the purchase, that itself is some check on speculative purchases since their risks are also high in such purchases. So some provision for relaxation of this condition is required for genuine cases.

I think for the common man, these provisions regarding deductions and taxability of income from house property will be considerably simplified once these anomalies are ironed out.

The table above compares present tax laws and proposed DTC.  

The provisions of the DTC have been considerably simplified for the purpose of this article and several intricate implications especially for non-individuals have been kept out in interests of simplicity.

The writer is CEO, Apna Paisa, a price & features comparison engine for loans, insurance and investments. He can be reached at hrdna@apnapaisa.com