Sec 80EE - Should you rush to buy a house?

“Increasing savings and their optimal allocation for productive uses lead to higher economic growth. The household sector must be incentivised to save in financial instruments rather than buy gold.” – Excerpt from Budget Speech of H’ble Finance Minister.

The Finance Minister proposed an additional deduction of interest of upto Rs. 1 lakh for first time home buyers under a newly introduced section 80EE. The intent here was very clear – to give fillip to infrastructure, steel & cement industry and also creation of jobs in the Construction Sector.

Prima Facie, the deduction looks attractive to first time home buyers.

So what does this newly introduced section say?

1. A deduction of interest (not exceeding Rs. 1 lakh) payable on loan taken by assessee from any financial institution for the purpose of acquisition of a residential property.

2. The deduction would be available in AY 2014-15 (i.e interest paid in FY 2013-14). If the limit of 1 lakh is not exhausted in AY 2014-15, the same would be carried forward to AY 2015-16.

3. The loan must be sanctioned during FY 2013-14.

4. The loan amount must not exceed Rs. 25 lakhs.

5.  The value of residential house property does not exceed Rs. 40 lakhs.

6. This must be the first residential house property purchased by the assessee.

Should the buyers hurry to buy homes?

This newly introduced section would be beneficial to only first time home buyers, that too if the property is intended to be self occupied. The existing limit on deduction of interest is Rs. 1.5 lakhs for self occupied property. If a buyer is planning to let out newly purchased property, this section is of no avail as entire interest would be allowed as deduction u/s 24 (Income from House Property).

Investors who buy properties to let out and earn rental income and capital appreciation need not hurry to buy property in 2013-14 as they would be indifferent to the newly introduced section.

The total tax benefit would be ranging between 10-30 thousand depending on the tax slab of the assessee.

This scheme may provide a fillip to housing sector in Tier-II and Tier III cities. To get a house for 40 lacs in Metros /Tier I Cities (including Sub-urbs/Outskirts) is quite difficult these days. Even if you get a house in the outskirts, you would mostly be letting out the same and if you let out your property, Section 80EE makes no difference.

The cap on loan of Rs. 25 lacs means that if you have to buy a house for 40 lacs, balance 15 lacs is to be funded from your savings. This might also be too much of asking from the middle class.

Let’s hope this brings the necessary boost to the real estate sector.