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80EEA of Income Tax Act for deduction of interest on affordable housing loan

80eea-of-income-tax-act-for-deduction-of-interest-on-affordable-housing-loan

Finance minister Nirmala Sitharaman in her Union Budget 2019 announced that taxpayers can claim an additional deduction u/s 80EEA of the Income Tax Act, 1961 of up to Rs. 1,50,000/- for interest paid on loans borrowed up to 31st March 2020 for purchase of an affordable house valued up to Rs. 45 lakh. Therefore, a person purchasing an affordable house will now get an enhanced interest deduction up to Rs. 3.5 lakh comprising deduction u/s 80EEA up to Rs. 1.50 Lakh and existing deduction of Rs 2 Lakh u/s 24.


Affordable housing - as the name suggests - refers to a unit of a house that a common man of a country can afford to buy which should aim to fulfil the housing needs of lower income group (LIG) or middle-income group (MIG) people of the country.

The aim of the government 'Housing for all by 2022' is towards providing affordable housing to low-income people, middle-income people and economically weaker sections who have considerably low levels of income (urban areas). Different policies are framed for rural and urban areas and for different cities due to the land constraint.

Over the years the government had taken various steps to boost the affordable housing sector and in this context, Pradhan Mantri Awas Yojana (PMAY) is an initiative by the Government of India in which affordable housing will be provided to the urban poor by 31st March 2022.

Incentives for the affordable housing sector through taxation policy is one of them.

Union Budget 2019 as well as Interim Budget 2019 provided income-tax incentives to the buyers of an affordable housing unit and the developers of the affordable housing units.

The income-tax incentives to the developer of affordable housing sectors u/s 80-IBA by the Interim Budget 2019 are discussed in this article.

While presenting the Union Budget, 2019 the Finance Minister in her budget speech announced several measures and tax incentives to boost the affordable housing sector. 

In para 26 of the Budget Speech, she announced that large public infrastructure can be built on land parcels held by Central Ministries and Central Public Sector Enterprises all across the country. Through innovative instruments such as joint development and concession, public infrastructure and affordable housing will be taken up.

For rural area, she announced "Pradhan Mantri Awas Yojana – Gramin (PMAY-G) aims to achieve the objective of “Housing for All” by 2022. A total of 1.54 crore rural homes have been completed in the last five years. In the second phase of PMAY-G, during 2019-20 to 2021-22, 1.95 crore houses are proposed to be provided to the eligible beneficiaries. These houses are also being provided with amenities like toilets, electricity and LPG connections. With the use of technology, the DBT platform and technology inputs, average number of days for completion of houses has reduced from 314 days in 2015-16 to 114 days in 2017-18."

While announcing the direct tax proposals she made it clear that her tax proposals would aim to stimulate growth, incentivise affordable housing, and encourage start-ups by releasing entrepreneurial spirits.

She incentivise the affordable housing sector by announcing an additional deduction of up to Rs. 1,50,000 for interest paid on loans borrowed up to 31st March 2020 for purchase of an affordable house valued up to Rs. 45 lakh.

The relevant para 117 of the Budget Speech is reproduced below-
117. For realisation of the goal of ‘Housing for All’ and affordable housing, a tax holiday has already been provided on the profits earned by developers of affordable housing. Also, interest paid on housing loans is allowed as a deduction to the extent of Rs. 2 lakh in respect of self-occupied property. In order to provide a further impetus, I propose to allow an additional deduction of up to Rs. 1,50,000/- for interest paid on loans borrowed up to 31st March, 2020 for purchase of an affordable house valued up to Rs. 45 lakh. Therefore, a person purchasing an affordable house will now get an enhanced interest deduction up to Rs. 3.5 lakh. This will translate into a benefit of around Rs. 7 lakh to the middle class home-buyers overtheir loan period of 15 years.
Para 4 of the Annexure to Part-B of the Budget Speech lists the incentives given to the affordable housing sector in the Union Budget 2019.

Incentives for real estate: 
4.1 Deduction of interest for affordable housing: In order to incentivise purchase of affordable house, it is proposed to provide a deduction upto Rs. 1,50,000 for interest paid on loan taken for purchase of residential house having value upto Rs. 45 lakh. This shall be in addition to the existing interest deduction of Rs. 2 lakh.
4.2 Alignment of definition of affordable housing with GST Acts: In order to align the definition of affordable housing in the Income-tax Act with the GST Acts, it is proposed to increase the limit of carpet area from 30 square meters to 60 square meters in Metropolitan regions and from 60 square meters to 90 square meters in non-metropolitan regions. It is also proposed to provide the limit on cost of the house at Rs. 45 lakh in line with the definition in the GST Acts.

In a separate Annexure to the Budget Speech titled 'Recent Direct Tax Initiatives' summarizes various tax incentives given to the affordable housing sector and real estate sector by the government in the last couple of years. The same is reproduced below for ready reference-

Measures to incentivise affordable housing and real estate: 

Housing has been an area of concern for the middle and lower-middle class. Further, real estate sector plays a significant role in generating employment in the economy. Considering the importance of housing sector, this Government has taken the following measures to promote this sector:

(i) Deduction of interest on loan taken to purchase self-occupied house property was increased from Rs. 1.5 lakh to Rs. 2 lakh. 

(ii) 100% deduction was provided for the income of affordable housing projects.

(iii) The base year for computation of long term capital gains was shifted from 1981 to 2001.

(iv) The holding period for long-term gain on immovable property was reduced from 36 months to 24 months. 

(v) Safe harbour of 5% on stamp duty value was provided for the purpose of computation of capital gains on immovable property.

To give legal colour to the budget announcements, amendments are carried on in the section 80-IBA of the Income Tax Act, 1961 vide Finance  (No.2) Bill, 2019. A new section 80EEA is introduced in the Finance  (No.2) Bill, 2019 to provide for an additional deduction of Rs. 1,50,000 for interest paid on loan taken for acquiring an affordable house.


For this purpose, an amendment is carried on in section 80-IBA vide clause 26 of the Finance (No. 2) Bill, 2019 and introduced a new section 80EEA in the following manner-

Clause 25 of the Finance (No. 2) Bill, 2019 introduced a new section for claiming deduction under section 80EEA in the following manner-

25. After section 80EE of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of April, 2020, namely:– 

80EEA. (1) In computing the total income of an assessee, being an individual not eligible to claim deduction under section 80EE, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property.

(2) The deduction under sub-section (1) shall not exceed one lakh and fifty thousand rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2020 and subsequent assessment years.

(3) The deduction under sub-section (1) shall be subject to the following conditions, namely:—
      (i) the loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2019 and ending on the 31st day of March, 2020;
     (ii) the stamp duty value of residential house property does not exceed forty-five lakh rupees;
        (iii) the assessee does not own any residential house property on the date of sanction of loan.

(4) Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.

(5) For the purposes of this section,––
        (a) the expression “financial institution” shall have the meaning assigned to it in clause (a) of sub-section (5) of section 80EE;
      (b) the expression “stamp duty value” means value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.


In order to provide an impetus to the ‘Housing for all’ objective of the Government and to enable the home buyer to have low-cost funds at his disposal, it is proposed to insert a new section 80EEA in the Act so as to provide a deduction in respect of interest up to Rs. 1,50,000 on loan taken for residential house property from any financial institution subject to the following conditions:

   (i) loan has been sanctioned by a financial institution during the period beginning on the 1st April, 2019 to 31st March 2020;

    (ii) the stamp duty value of house property does not exceed forty-five lakh rupees;

   (iii) assessee does not own any residential house property on the date of sanction of loan.

It is also proposed that where a deduction under this section is allowed for any interest, deduction shall not be allowed in respect of such interest under any other provisions of the Act for the same or any other assessment year.

This amendment will take effect from 1st April, 2020 and will accordingly apply in relation to assessment year 2020-21 and subsequent assessment years.

On reading the above provision, the abstract of section 80EEA is given below-

  1. The deduction u/s 80EEA is included as a deduction under Chapter VI-A.
  2. This deduction is in addition to the deduction of Rs. 2 Lakh available u/s 24 of the Income Tax Act, 1961.
  3. This deduction is available only to an Individual taxpayer.
  4. The maximum amount of deduction u/s 80EEA that can be claimed under this section in an assessment year is Rs. 1,50,000.
  5. The loan is taken from a financial institution which means a bank and a housing finance company.
  6. The loan is taken for the purpose of acquisition of a residential house property only.
  7. The loan is sanctioned by the financial institution in the FY 2019-20.
  8. The stamp duty value of the property shall not exceed Rs. 45 Lakh. Please note that the deduction is linked to the value of the property as per stamp duty valuation and not on the basis of actual consideration paid for acquiring the residential house property. For example, if the actual consideration of the house is Rs. 40 Lakh but the stamp duty value is Rs. 48 Lakh then no deduction can be claimed u/s 80EEA because of the reason that the stamp duty value is more than Rs. 45 Lakh even though the actual consideration of Rs. 40 Lakh is less than the limit of Rs. 45 Lakh. No provision exists for disputing the stamp duty value of the property.
  9. The assessee does not own any other house property on the date of sanction of loan.

If all the above-mentioned conditions are satisfied, then the individual can claim the deduction u/s 80EEA from AY 2020-21.

Analysis of the section 80EEA: The deduction is available only if the individual is not the owner of any other residential house property on the date of sanction of loan. After the sanction, he or she can buy another residential house property.

Further, for claiming the deduction it is not necessary to pay the interest during the previous year. The deduction can be claimed even if the interest is payable in the previous year. The maximum amount of interest on loan taken for the purpose shall not exceed Rs. 1,50,000 in the assessment year. If the interest amount is more than Rs. 1,50,000, the balance amount of interest can be claimed under section 24, subject to a maximum of Rs. 2,00,000 under that section.

This deduction is available for both self-occupied and let-out house property.

The most important condition to note that deduction under this section is available only for the acquisition of the residential house property. It is not available for the construction of house property even if other conditions are satisfied.

Clause 26 of the Finance (No. 2) Bill, 2019 amended section 80-IBA in the following manner-

26. In section 80-IBA of the Income-tax Act, with effect from the 1st day of April, 2020,—
(A) in sub-section (2), after clause (i), the following proviso shall be inserted, namely:—
‘Provided that for the projects approved on or after the 1st day of September, 2019, the provisions of this sub-section shall have effect as if for clauses (d) to (i), the following clauses had been substituted, namely:––
“(d) the project is on a plot of land measuring not less than—
(i) one thousand square metres, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or
(ii) two thousand square metres, where such project is located in any other place;
(e) the project is the only housing project on the plot of land as specified in clause (d);
(f) the carpet area of the residential unit comprised in the housing project does not exceed—
(i) sixty square metres, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or
(ii) ninety square metres, where such project is located in any other place;
(g) the stamp duty value of a residential unit in the housing project does not exceed forty-five lakh rupees;
(h) where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual;
(i) the project utilises—
(i) not less than ninety per cent. of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be, where such project is located within the metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); or
(ii) not less than eighty per cent. of such floor area ratio where such project is located in any place other than the place referred to in sub-clause (i); and
(j) the assessee maintains separate books of account in respect of the housing project.”

(B) in sub-section (6), after clause (e), the following clause shall be inserted, namely:—
‘(f) “stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.’

Prior to amendment, clause (d) to (i) to section 80-IBA(2) reads as follows-
......
......
(d) the project is on a plot of land measuring not less than—
  (i) one thousand square metres, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai; or
 (ii) two thousand square metres, where the project is located in any other place;
 (e) the project is the only housing project on the plot of land as specified in clause (d);
 (f) the carpet area of the residential unit comprised in the housing project does not exceed—
  (i) thirty square metres, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai; or
 (ii) sixty square metres, where the project is located in any other place;
 (g) where a residential unit in the housing project is allotted to an individual, no other residential unit in the housing project shall be allotted to the individual or the spouse or the minor children of such individual;
 (h) the project utilises—
  (i) not less than ninety per cent of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be, where the project is located within the cities of Chennai, Delhi, Kolkata or Mumbai, or
 (ii) not less than eighty per cent of such floor area ratio where such project is located in any place other than the place referred to in sub-clause (i); and
  (i) the assessee maintains separate books of account in respect of the housing project.

---- which after the amendment will read as follows-
Append clause 26 of the Bill after the existing clause (i) cited above.

Effect of amendment: The amendment in the Finance (No. 2) Bill, 2019 will come into operation from 1st April 2020 and shall substitute the existing clauses (d) to (i) from AY 2020-21.

Clause 26 of the Bill seeks to amend section 80-IBA of the Income-tax Act relating to deductions in respect of profits and gains from housing projects. 

The provisions of the said section, inter alia, provide that where the gross total income of an assessee includes any profits and gains derived from the business of developing and building housing projects, there shall, subject to certain conditions, be allowed, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business. 

It is proposed to amend the said section so as to provide that a housing project approved on or after the 1st day of September, 2019 shall be eligible for deduction under this section if the carpet area of the residential unit comprised in the housing project 
  • does not exceed 60 square metres, where the project is located within the Metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region), or 
  • 90 square metres, where the project is located in any other place; and 
  • if the stamp duty value of a residential unit in the housing project does not exceed Rs. 45 Lakh
It is also proposed to amend the said section so as to define the expression "stamp duty value". 

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

A brief comparison of existing and amended provision of section 80-IBA is given in the table below-

Criteria
Existing Provision
Amended Provision
Remarks
Area of land and location
1000 sq. mtr for Chennai, Delhi, Kolkata or Mumbai
1000 sq. mtr for metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region)
New cities added
For other cities
2000 sq. mtr
2000 sq. mtr.
No Change
Carpet area of a residential unit
30 sq. mtr. for Chennai, Delhi, Kolkata or Mumbai
90 sq. mtr for metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region)
Area changed and new cities added
For other cities
60 sq. mtr
90 sq. mtr.
Area changed
Utilization of 90 percent FAR
for Chennai, Delhi, Kolkata or Mumbai
for metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region)
New cities added
For other cities
Utilization of 80 percent FAR
Utilization of 80 percent FAR
No Change
Stamp Duty Value of a residential unit
NA
Rs. 45 Lakh
Cap in value introduced
Separate books of accounts for the project
To be maintained
To be maintained
No Change



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