The steps under consideration include a bigger tax benefit to encourage purchases, softer interest rates for affordable housing and restoring some benefits for a second house.
“There is a view that some incentives need to be given to encourage the housing sector,” a senior government official said, adding that various options, including higher tax incentives or steps to boost the affordable housing sector, are being considered.
Discussions have taken place, the official said, adding that a final call on the proposal will be taken closer to the July 5 budget.
Policymakers are eyeing measures to reverse the economic slowdown and housing is seen as one of the potential sectors that can aid the process. India’s GDP slowed to a five-year low of 6.8% in FY19.
The Narendra Modi-led government had raised the maximum deduction from income for interest paid on a loan for self-occupied house from Rs 1.5 lakh to Rs 2 lakh in its maiden budget in July 2014.
Effectively, for a person in highest 30% income tax rate, this meant a rise in tax saving from Rs 45,000 a year to Rs 60,000 a year.
Full deduction can be claimed if construction is completed within five years, which leads to issues where possession is delayed. The government could allow some benefit for the preconstruction period, keeping in view the delays faced by buyers. One of the options could be to allow the entire interest deduction for preconstruction.
“Bunching of interest of preconstruction period with the current year with a limit of Rs 2 lakh needs to be removed as the individual is never able to recoup the interest actually paid to the bank,” said Rakesh Nangia, founder and managing partner, Nangia Advisors LLP.
Previously, individuals having a second house could claim deduction on the interest paid on the housing loan without any monetary limit in a year. The loss, arising from interest being more than rental income, was eligible for offset against other income. In the budget for FY18, this deduction for interest on a second house had been capped at Rs 2 lakh. The loss is allowed to be carried forward for eight assessment years.
However, with lower rental yields, it has become difficult to offset this loss.
Tax experts said removal of these restrictions and reverting to the previous regime will provide relief to taxpayers as the primary investment of most of Indians is in real estate.
“Investors who have bought houses on loans will be able to set off these losses on account of the big difference in rental yields and prevailing interest rates,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.
Apart from taxpayers, such a move will help clear unsold inventory and provide a boost to the real estate sector, which has been struggling for the last several years, Maheshwari said.