For self-occupied homes, the deduction for interest is capped at Rs 2 lakh a year – a figure unchanged since 2015. (AI image)

Falling home-loan rates, increase in young population seeking to buy homes and a steady revival in residential sales have encouraged many to take the plunge into home ownership. Tax incentives continue to be a major attraction for borrowers — but several provisions in the Income-tax Act have not kept pace with rising property prices, bigger loan sizes and frequent delays in construction. As a result, taxpayers often discover that the benefits they assumed they were entitled to are either capped, postponed or unavailable.Pre-construction interest: EMIs now, deductions laterOne of the biggest pain points arises when individuals buy under-construction property. EMI payments begin immediately, but the tax deduction for interest paid during the construction period is deferred. The law currently allows this interest to be claimed only in five equal instalments starting from the year in which the construction is completed, or possession is obtained. Hinesh R Doshi, chartered accountant and past president of The Chamber of Tax Consultants says, “In an environment where project delays are common, this effectively means taxpayers shoulder EMIs, with no tax relief for years. If the borrower is also bearing the brunt of rent expenses, it means a greater financial burden. Allowing EMI deductions in the year of payment has gained urgency”.The Rs 2 lakh cap that no longer reflects realityFor self-occupied homes, the deduction for interest is capped at Rs. 2 lakh a year — a figure unchanged since 2015. As property values and loan sizes having risen sharply, this cap has lost relevance. If construction is not completed within five years from the end of the year in which the loan was taken, the deduction collapses further to just Rs. 30,000. Doshi comments that “Many taxpayers find these limits outdated and out of sync with today’s housing market, wherein prices has tripled in ten years”.Affordable housing deduction lapsesThe additional Rs. 1.5 lakh deduction introduced for first-time buyers of affordable homes expired in March 2022. It was intended to encourage purchases of units with a stamp duty value of up to Rs. 45 lakh. With affordability pressures persisting and housing costs climbing even in smaller cities, there have been repeated suggestions to reinstate or extend this benefit.Doshi is of the view that section 80EEA must be re-introduced to lure new buyers and boost housing sector for first time buyers. This must be continued for several years, as we have huge population below age of 35 years looking to buy a house.Loans from private sources: limited reliefHome loans taken from non-banking sources — such as employers, friends, relatives or private lenders — qualify for an interest deduction but not for a principal deduction under section 80C. Nor do such loans qualify for any additional housing benefits that were earlier available for affordable housing. Borrowers unable to access bank or housing finance company loans due to documentation challenges or credit scores or legal issues with project sanctions etc are therefore disadvantaged, even though the cost of borrowing may be similar.Doshi recommends that the existing provision of 80C should be amended to include borrowers who obtain loans from private sources or from non-banking finance companies.The 80C bottleneckRepayment of housing-loan principal qualifies for deduction under section 80C but must compete for space within the overall Rs. 1.5 lakh limit. With PPF, EPF, ELSS and life insurance premiums also claiming this quota, many taxpayers find themselves unable to claim the full principal repayment. Some experts suggest carving out a separate limit for home-loan principal or raising the current cap to reflect present-day financial realities. Doshi recommends, “A separate deduction of Rs. 1.50 lakh should be added to existing limit of Rs 1.50 lakh for repayment of housing loan. Also, the threshold limit should be enhanced to Rs. 2.50 lakh so as to make housing loan affordable to every citizen of India”Another issue is the reversal rule: if the property is sold within five years of purchase, all principal deductions claimed earlier become taxable in the year of sale.New tax regime denies key housing benefitsUnder the new, lower-tax personal income-tax regime, two major benefits are not available:

This has left many salaried individuals reconsidering whether the simplified regime truly works in their favour, especially if they have significant housing-loan outgo.Why the law needs updatingHousing is a long-term financial commitment, and the tax framework should ideally support this investment rather than amplify challenges. Several provisions — particularly those dealing with pre-construction interest, deduction caps and eligibility criteria — were designed for a very different real-estate market. Today’s home buyers are coping with higher EMIs, longer construction cycles and tighter budgets.A relook at these provisions could ease financial strain on borrowers while giving a boost to the housing sector, which has strong linkages with employment and economic growth. With the Union Budget approaching, home buyers will be watching closely to see whether long-pending concerns finally get addressed.