A combination of attractive home loan interest rates, a growing young population eager to own property, and a steady recovery in residential sales is motivating many Indians to purchase their first home. However, the anticipated tax benefits, a major attraction for borrowers, are often not as lucrative as expected due to provisions in the Income-tax Act that have failed to evolve with rising property prices, larger loan amounts, and frequent construction delays.
Key Tax Pain Points for Home Buyers
One of the most significant issues arises for buyers of under-construction properties. While Equated Monthly Installment (EMI) payments start immediately after loan disbursement, the tax deduction for the interest paid during the construction phase is not available in real-time. The law currently allows this pre-construction interest to be claimed only in five equal annual instalments, starting from the financial year in which the construction is completed or possession is taken.
Hinesh R Doshi, a chartered accountant and past president of The Chamber of Tax Consultants, highlights the problem. "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," he states.
Outdated Deduction Caps and Lapsed Benefits
For self-occupied homes, the annual deduction for home loan interest is capped at Rs. 2 lakh, a limit that has remained unchanged since 2015. With property values and loan sizes soaring across Indian cities, this cap has lost its relevance. The situation worsens if construction extends beyond five years from the end of the year the loan was taken, as the deduction plummets to a mere Rs. 30,000 per annum.
"Many taxpayers find these limits outdated and out of sync with today’s housing market, wherein prices have tripled in ten years," Doshi comments.
Further, the additional Rs. 1.5 lakh deduction under Section 80EEA for first-time buyers of affordable homes (with a stamp duty value up to Rs. 45 lakh) lapsed in March 2022. Despite persistent affordability pressures and rising costs even in tier-2 and tier-3 cities, this benefit has not been reinstated. Doshi advocates for its reintroduction to lure new buyers and boost the housing sector, especially for the huge population under 35 looking to buy a house.
The 80C Bottleneck and New Regime Drawbacks
Repayment of the housing loan principal qualifies for a deduction under Section 80C, but it must compete for space within the overall Rs. 1.5 lakh limit shared with investments like PPF, EPF, ELSS, and life insurance premiums. This often leaves taxpayers unable to claim the full benefit of their principal repayment. Experts suggest creating a separate limit for home-loan principal or raising the current cap.
Doshi recommends, "A separate deduction of Rs. 1.50 lakh should be added to the existing limit of Rs 1.50 lakh for repayment of housing loan. Also, the threshold limit should be enhanced to Rs. 2.50 lakh to make housing loans affordable for every citizen of India."
Another critical limitation affects loans from non-banking sources like employers, friends, or private lenders. While interest on such loans is deductible, the principal repayment does not qualify under Section 80C, nor do these loans avail of any special housing benefits, disadvantaging borrowers who cannot access formal financing.
Compounding these issues, the new optional tax regime denies two major housing benefits: the deduction for interest on a self-occupied property and the Section 80C deduction for principal repayment. This forces salaried individuals with significant home loan EMIs to carefully reconsider if the simplified regime is advantageous for them.
An Urgent Call for Policy Modernization
Housing is a long-term financial commitment, and the tax framework should support this investment rather than amplify challenges. Key provisions dealing with pre-construction interest, deduction caps, and eligibility were designed for a different real estate era. Today's buyers grapple with higher EMIs, prolonged construction cycles, and tighter budgets.
A comprehensive review and update of these provisions could significantly ease the financial strain on borrowers while providing a much-needed boost to the housing sector, which has strong linkages with employment and broader economic growth. With the Union Budget on the horizon, home buyers and industry experts will be watching closely to see if these long-pending concerns are finally addressed.
