New Delhi: The Department of Revenue, Central Board of Direct Taxes, Tax Policy & Legislation Division recently came out with a discussion paper inviting views of the tax payers across the country on continuance or removal of various exemptions and deductions in the Income Tax Act.
There are altogether 162 deductions and exemptions outlined in the circular.
The following paragraphs will throw light on the real estate exemptions and deductions in the statute book as also the impact on the tax paying public of India in case they are withdrawn:
1. House Rent Allowance
As per section 10(13A) the house rent allowance received by a salaried employee is exempt from the purview of Income Tax.
This exemption is available to salaried employees if they spend the amount of house rent allowance in getting an accommodation on rent.
Further Rule 2A of the Income-tax Rules, 1962 provides details about the maximum limit of exemption in respect of the said house rent allowance.
Briefly, it means that if the exemption in respect of house rent allowance is withdrawn from Income-tax Act, 1961, then most of the salaried employees receiving house rent allowance would be required to pay substantially higher amounts of Income Tax.
The Government should not consider removing this exemption as if it is withdrawn, salary would rise in almost all sectors because of the impact of extra income-tax liability on house rent allowance.
2. Deduction of interest on Housing Loan
As per section 24 of the Income-tax Act, 1961 a deduction of up to Rs 1, 50,000/- per annum is allowed to every individual tax payer as also Hindu Undivided Family on a housing loan taken on or after 1st April, 1999.
The only condition to avail of this deduction is that the amount of loan should be utilized for construction of a self-occupied property.
Presently, all those tax payers falling in the higher income bracket are able to enjoy a huge tax saving of up to Rs.45, 000/- per annum merely because of this deduction on their interest component.
So if the Government were to remove the deduction in respect of interest on housing loan, then most of the taxpayers would face an additional income-tax liability to the extent of Rs 30, 000/- to Rs 45, 000/- per annum. In the event of cancellation of this deduction the loan may not seem to be attractive to the taxpayer.
That apart, the removal of this deduction would also mean a huge blow to the housing sector, which in turn would also lead to a rise in the unemployment rate in the country.
In the event of tax payers not going for housing loans the shortage of housing would be on the rise. This will make life more miserable for the Government.
The Government should appreciate that by granting deduction for interest on housing loan it is encouraging the tax paying public of India solve their own housing needs.
In view of the above discussion it is recommended that the Government at least for the next two decades should not think of removing deductions in respect of the housing loan for self-occupied residential property at all.
Rather the need of the hour is to extend this limit of deduction for housing loan interest from Rs 1, 50,000/- to the actual amount of interest for first property in case of a residential house in view of the changing trend whereby tax payers are now going for higher value residential accommodation.
3. Depreciation on Real Estate
The Depreciation allowance has also been included in the list of deduction permissible under the Income-tax Act, 1961.PAGE_BREAK
Depreciation available with regard to immovable property is allowed on buildings used for residential purposes as well as non-residential purposes.
The rate of depreciation on buildings varies from five per cent to ten per cent of the Written Down Value.
Likewise, in respect of temporary erection in the form of a building such as wooden structure the depreciation rate is 100 per cent.
Almost all taxpayers having Income from Business or profession are taking advantage of deductions by way of Depreciation on their buildings.
There is no logic at all in canceling this deduction. The grant of depreciation is nothing special and as such it should not have been in the list of exemptions and deductions.
Depreciation is a normal item of business expenditure and as such the entire depreciation whether on real estate or otherwise should continue to be granted to the tax paying public of India based on the principles of normal accounting whereby the value of the assets gets reduced due to normal use.
The Depreciation on buildings is granted as per the Income Tax Act, 1961 depending on the life of the building. Thus, depreciation is one of the many items of normal business expense, which is allowed as a deduction the world over.
4.Exemption of long-term capital-gain on sale of residential house
Presently as per Section 54 of the Income Tax Act, 1961 the long-term capital gain derived by an individual or a Hindu Undivided Family on sale of a residential house is exempted in case the capital gain amount has been invested in purchase/construction of another residential house.
Various conditions and limits are mentioned in section 54 of the Income-tax Act, 1961.
This exemption of capital gain is to encourage the taxpayers to utilise the proceeds on selling existing residential house property by investing in another residential property.
This exemption is not by way of providing tax benefit but it is aimed at taking care of the artificial increase in the value of present day residential properties sold.
The money is again invested in buying another residential property. Hence, this exemption granted to the taxpayer should continue.
The provisions of section 54 were amended nearly 20 years ago and in the last 20 years this provision has been instrumental in inspiring the taxpayer to go in for expansion of his residential property without being liable to tax payment.
The detailed provisions relating to capital gain on investment in residential property are very exhaustively dealt with in the above-mentioned section 54 and as such the Government should let the same continue as it is.
5. Exemption of capital-gain of other asset invested in residential house
As per section 54F of the Income-tax Act, 1961 an exemption is available to individual and Hindu Undivided Family in respect of capital gain arising to them on transfer of long-term capital asset other than residential house property in case such long-term capital gains are invested in residential house property.
The basic purpose of this section is to provide incentive to the tax payers to invest the capital gain amount in a residential house property specially when the capital gains arise by selling some assets other than a residential house property.
The objective of this section was to encourage taxpayers to build their own houses. This section has been instrumental the housing problem in the country to a great extent.
Thus, residential housing gets a boost. And even today large number of tax paying public are resorting to the provisions contained in section 54F to save taxes by making investment of the capital gain in the residential house property.
Already there are a number of restrictions in the law in order that residential house property is not used as a tool to acquire and hoard real estate by a selected few.
If the Government withdraws the exemption in terms of section 54F in the light of the above discussion paper, surely it will bring adverse effect on the housing problem in the country.
The tax paying public of India should send in their views on removal or continuance of the various exemptions and deductions to The Central Board of Direct Taxes latest by 5th July, 2006.
The author, Subhash Lakhotia is tax and investment consultant at New Delhi for the last 35 years.
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