Impact of the Direct Tax Code, 2009 on the housing sector

With the Direct Tax Code draft released by the Finance Minister, Pranab Mukerjee, there were lot of questions surrounding the impact it has on various sector. Let us look at the famous housing sector.

There were several sops given to boost the housing sector in the earlier budgets. Let us see how these were treated in this Tax Code, 2009.

(a) Interest on the housing loan borrowed for acquiring, construction etc.,

Currently the interest paid by an assessee on the self-occupied property is allowed as a deduction from the taxable income to the extent of Rs.1,50,000. But in the new Tax Code, this is not available.

(b) Repayment of principal of loan amount taken for acquiring, constructing etc., a housing property.

Now the re-payment of the principal amount is allowed as a deduction u/s 80C (within the overall limit of Rs.1,00,000). But this benefit has been removed under the new Tax Code.

(c) Deduction for Repairs & Maintenance
Now the assessee can claim a deduction of 30% of the Annual Value, if the house is let out for tent. In the new Tax Code, 20% on the Gross Rent is allowed as deduction.

Also, we had some benefits in investing the capital gains in a Property to escape Capital Gains. But it is also gone now. Following are the deductions from Capital Gains, if you invest the CG in Property or deposit in a CG Savings Scheme.

Deduction # 1
Capital Gain from....: Any investment Asset
Investment in..........: Residential house
Conditions to be met:
(i) The assessee does not own any residential house, other than the new investment asset, on the date of transfer of the original investment asset; and
(ii) The original investment asset was acquired prior to one year before the beginning of the financial year in which the transfer of the asset took place.

So, if you have 2 residential house and sell one and invest in a new residential house, you will not be eligible for the benefit.

Deduction # 2
Capital Gain on....: Any investment Asset
Investment in......: Deposit in an account maintained under the Capital Gains Savings Scheme
Conditions to be met :
(i) The original investment asset was acquired prior to one year before the beginning of the financial year in which the transfer of asset took place; and
(ii) The deposit is made within a period of sixty days from the date of transfer of the original investment asset.

The housing sector reeling under the pressure of the economic downturn and most of the builders trying to sell their properties with great difficulty. Earlier, people started investing in the second property, as the return on the real estate and the tax sops was good. Also, the banks were lowering their interest rates to woo the common man to purchase / construct a property.With the tax benefits gone, the prices of properties started to going up, the demand for the housing property will go down, unless you are trying to own a property for the first time.

The new tax code, if put to use will be applicable only from 1-Apr-2011. So, if you have any loan for your existing property and having some surplus money, better pay off the loan before the Act is in place.

Please note : The views are my own on a plain reading of the Direct Tax Code 2009. Better check with your Financial Advisor before taking any decision.



Bala on Aug 21, 2009, 12:41:00 PM said...

Good one, Gopal !!

After reading through, I felt like the title should be "Negative Impact of the Direct Tax Code, 2009 on the housing sector".

Housing Sector is going to be hit so badly, though it is too early to predict what will be the situation 2 years down the line from now.


Anonymous said...

I disagree with Bala.Coming from a real estate background,I can state confidently that even though it was one of the worst affected sectors, it is showing very positive signs of revival & the market is quite resilient(in spite of much needed price corrections)The focus of developers would most definitely be on affordable/compact/low cost housing

Anonymous said...

Thank you Sir for explaining this in detail.

I was planning to do Investment in property ( by selling my new one and going for bigger one in city limits ), but keeping in mind that my tax will be saved for payments made towards interest and principle paid towards housing loan.

But, now I think I will wait and see impact of this on actual property market.

Will it impact by reduction in current property rates to say 20 - 30% reduction as new buyer's tax benefit to that level will be reduced ?

Gopal Ramanan on Sep 4, 2009, 3:47:00 PM said...


Dont jump to conclusions. Do not merely look into the tax benefits. It may change anytime. Also, it depends on your taxable income. For example if your taxable income is say Rs.15,00, save tax on it, as the various tax brackets have been widened. For a taxable income (before Int on Housing loan) of Rs.15,00,000 -
(a) Existing law, with tax benefit of Rs.1,50,000 - The tax would be Rs.3,09,000.
(b) Proposed law, without the tax benefit, your tax would be Rs.1,84,000 (you save Rs.1,25,000)
My advise is that - do not plan anything for long term based on tax rate - as it may get changed every year.


Anonymous said...

Real Estate sector would be hit badly. Similar laws were bought in USA in 1986 and housing market crashed there. Bubble and speculation would go out from real estate, and people would be able to buy houses with general bench mark (3 years gross revenue)

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