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DTC Bill – Few Give & Takes

September 3, 2010

Direct Tax Code Bill is not just about MAT or concessions to SEZs, it affects a common man who is employed and receives a monthly salary with necessary income tax deductions. Every budget season, the national planners and economists engage in debates on pros & cons of deciding to give more money in hands of consumers to promote spending but at the risk of controlling inflation and reduced savings. The recent DTC Bill approved by government has dealt with many such instruments that calls for some reworking of our savings, investments and most importantly ‘cash in hand’.

In context of a decision to buy a residential property availing home loan, there are a few important give & takes presented in the DTC Bill. The exemption of interest payment to a maximum of 1.5 lac is retained, but without a restriction of being applicable only to single property. This relaxation translates to additional benefit to individuals aspiring to buy a second property and their existing loan repayment nearing term with interest component falling short of the Rs. 1.5 lac exemption level. Hence we understand that this benefit can be enjoyed by only those who can afford a second property and reached an advanced stage of repayment of existing loan.

Even thought the total exemption limit has moved up to Rs. 1.5 lac from Rs. 1.35 lac (including Rs. 20,000 for Infra Bonds, and Rs. 15,000 for Mediclaim) with an enhanced component of Medical Claim, Term Life Insurance and Tuition Fees, there is an evident downside to the exemption components faced by an individual tax payer. The principal payment towards home loan to a maximum of Rs. 50,000 was part of the earlier Rs. 1.0 lac exemption group. Moreover the ELSS which qualified to be part of this exemption group is no longer available as investment products with tax exemption advantage. So now one needs to find a way to find substitute tax saving instruments to fill the void created by removal of principal repayment and ELSS options.

Will this affect the decision of buying a house? No, there are multiple factors supporting this decision. Would this affect the decision to avail a home loan? Not really, even though there would be a reduction to a maximum of about Rs. 17,000 yearly from ‘cash in hand’. If the markets are supportive and prospects of appreciation remain healthy, the changes as a result of DTC Bill should not be worrying the Real Estate sector.

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