DTC – Bittersweet news for the housing sector

The Direct Tax Code (DTC), which was proposed by the govt. in Aug 2009, is likely to be implemented from Apr 2012. DTC will replace the Income Tax Act of India, and aims to be more efficient than the previous act.

The DTC regulation is different from the current Income Tax guidelines, and this could impact individual tax payers. We, at DSIJ, have tried to analyse how the DTC will impact the housing sector.

The following are the changes which the DTC draft has made with respect to house property:

• Under Sec 80C of the Income Tax Act, the principal amount repayment in case of a housing loan was eligible for tax deduction upto a limit of Rs 1 lakh. However, under DTC norms, this deduction has been withdrawn. After the implementation of the DTC (expected from Apr 2012), individuals will not get tax exemption in case they are repaying the principal amount.
• However, the DTC has retained tax exemption of up to Rs 1.5 lakh for the interest expense paid against the housing loan, which comes under Sec 24 of the existing Income Tax Act.
• Also, under Sec 24 of the Income Tax Act, a deduction of 30% was allowed towards the repairs and maintenance of residential property that had been let out. Under the DTC though, this deduction is only up to 20% of the amount. This will increase the taxable value that individuals earn when they let out property.
• Under the Income Tax Act, if an individual had multiple house property than only one of those was to be considered as self occupied property (SOP), while all the rest was held as 'deemed let out property' (DLOP) – thus, even if the house was vacant and was not given for rent, it was taxable assuming a notional rent. This rule has been revised under the DTC, which says if the property is let out and actual rent is received, only then will it be taxable, otherwise not.
• Advance rent received in the current year was taxable in that year. However, under DTC, the amount (rent received) chargeable as tax would only be the amount which is of the current financial year.

The removal of the principal amount deduction benefit will definitely hit individuals hard. In a metro city like Mumbai, buying a house remains a dream for many individuals, with affordability being the key issue. Individuals spend half of their monthly earnings on housing loan repayment, and the remaining is used for consumption. Of that EMI, only the interest component would be exempted (up to Rs 1.5 lakh), while the principal payments will be taxed. This will make it very hard for individuals. On the other hand, the removal of notional rent would prove to be beneficial for investors, as they would be taxed only if they actually let out the property.

The guidelines are definitely good for the upper class, who invest in property. However, it will not be good people from the middle and lower income groups, who buy property for their basic need of shelter.