Industry Classification

Life cycle position

Housing finance as a financial service is relatively young in India. The growth in

housing and housing finance activities in recent years reflect the buoyant state of the
housing finance market in India. The real estate sector is the second largest
employment generator in the country.

In 1970, the state set up the Housing and Urban Development Corporation (HUDCO)
to finance housing and urban infrastructure activities, in 1977, the Housing
Development Finance Corporation (HDFC) was the first housing finance company in
the private sector to be set up in India.

Currently there are 29 HFCs approved for refinance assistance from NHB.

The following types of home loans are generally available in the market:

· Home Equity Loans: A form of finance to the customer by way of mortgage

of existing property to the financier for taking a loan for some other purpose. The
current market value of the property is the basis for providing home equity loans.

· Home Extension Loans: The purpose of this loan is the extension of existing
houses tike the addition of rooms, toilet facilities etc. Such loans fall under the
category of home loans.

· Home Improvement Loans: These loans are provided mainly for repairs
and maintenance of existing houses- These could include internal and external
repairing, waterproofing and roofing, complete interior renovation, tiling and flooring
etc.

· Home Purchase Loans: Finance provided for the purchase of ready-made

houses.

· Land Purchase Loans: These loans are being provided for the purchase of
land for the purpose of construction of residential houses.

Top

Business cycle
 Top

___________________________________________________________________
_____________

External Factors
Government

Policy Annoucement in Last Quarter

NBFCs’ growth had been constrained due to lack of adequate

capital.

On 2 January 2009, the government and the Reserve Bank of India

announced another set of measures to stimulate the economy, after having
announced a few measures in December 2008. The package focuses on:

Reviving demand for the housing sector by facilitating Rs.4,000 crore

refinancing facility for National Housing Bank (NHB), granting priority
sector lending status to loans upto a maxi mum limit of Rs.20 lakh per
dwelling per family by housing finance companies with the approval of NHB,
concessional treatment to commercial real estate loans which have been
restructured upto 30 June 2009 and lowering the interest rates on home
loans upto Rs.20 lakh.

The package will not provide a major boost to the residential market
immediately as property prices play an important role while making a
buying decision. Property prices continue to remain high with an average
home in metro cities costing well above Rs.20 lakh, the upper limit of the
amount on which interest rate concession is granted.

The government eased the external commercial borrowing (ECB) norms by

allowing non-banking finance companies and housing finance companies to
raise money overseas through FCCBs subject to RBI approval.

General Policy

Policy Changes Expected in the Near Future

Top

Social
The mortgage penetration continues to remain abysmally low – in India the
mortgage to GDP ratio is at around 6% (in FY08) against over 51% in the USA. Even
if one were to benchmark against more comparable counterparts, the ratio ranges
from 15% to 20% for most South East Asian nations.

High down payment requirement and non-availability of the title deeds in the
absence of land records are some of the reasons responsible for the inability of the
companies in reaching out to the vast population living in rural areas.

Top

Demographic
Housing finance assistance of formal institutions has been limited to the middle-
income and high- income groups. Companies have also not been able to penetrate
the rural areas.

Top
___________________________________________________________________
_____________

Demand Analysis
End users

The housing finance sector in India has undergone unprecedented change over the
past two decades. The consumption pattern amongst the Indian population is
expected to change 2013. The strivers are less but aspirers and rich are significant
higher compared to 2003.

Top

Real and Nominal Growth

The tower interest rate regime, rising disposable incomes, stable property prices and
fiscal incentives made housing finance attractive business for commercial banks.
Further, housing finance traditionally has been characterized by low nonperforming
assets (NPAs) and given the vast demand for housing loans, almost at t the major
commercial banks plunged into the business of housing finance. The robust growth
during the last decade has been triggered by a number of factors, some of which are
listed below:

· Tax rebates on housing loans announced consistently in the annual budgets of

the country.

· Fatting interest rates on home loans: Fixed interest rates calculated on an

annual rest basis for a loan of Rs. 1 million for tenure of 15 years have fatten from
16% in 1997-98 to 9.5% in 2005-06. Floating rates for short maturity housing loans
are today hovering in the range of 7.75-9.75%.

· Greater amount of professionalism of the real estate developers and builders

who are capable of acquiring clearer titles and completing the projects on time.
· Borrowers can raise up to 100 % of even 110% (in which case the tenders
provide financial assistance for the complete property value, stamp duty, registration
and an additional 10% is given for the interior decorations) of their borrowing
requirement from the tenders.

IndianGround.Com » Home Loans India » Tax Benefits on Home Loans

Tax Benefits on Home Loans

As the Indian real estate market makes an upward swing, and investors opt for housing
finance or home loans, tax benefits obtained from them is a lucrative option. Customers
availing of Home Loans can claim a certain portion of the interest and principal that they
pay towards the loan installments for reducing tax liability. Resident Indians are eligible
for certain tax benefits on principal and interest components of a loan under the Income
Tax Act, 1961. Moreover, an added tax benefits under Sec 80 C on repayment of
principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce your tax
liability by about Rs. 30,000 p.a.

Tax benefits can be claimed on both the principal and interest components of the home
loan as per the Income Tax Act, 1961. These deductions are available to assesses, who
have taken a loan to either buy or build a house, under Section 24(b). Interest on
borrowed capital is deductible up to Rs 150,000 if the following conditions are satisfied:

• Capital is borrowed on or after April 1, 1999 for acquiring or constructing a

property.
• The acquisition/construction should be completed within 3 years from the end of
the financial year in which capital was borrowed.
• The person, extending the loan, certifies that such interest is payable in respect of
the amount advanced for acquisition or construction of the house
• A loan for refinance of the principle amount outstanding under an earlier loan
taken for such acquisition or construction.

If the conditions stated above are not fulfilled, then the interest on borrowed capital is
deductible up to Rs 30,000 though the following conditions have to be satisfied:

• Capital is borrowed before April 1, 1999 for purchase, construction,

reconstruction repairs or renewal of a house property.
• Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or
renewals of a house property.
• If the capital is borrowed on or after April 1, 1999, but construction is not
completed within 3 years from the end of the year, in which capital is borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is eligible for a
deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07.
Terms and conditions for availing Tax benefits on Home Loans

1. Tax deductions can be claimed on housing loan interest payments, subject to an

upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be
claimed as a deduction, subject o the stated upper limit.
2. An additional loan for extension/addition to the same house and the person's
deductions on the existing loan are less than Rs 150,000; he can claim further
benefits from the additional loan taken, subject to the upper limit of Rs 150,000
for a financial year.
3. Tax benefits under Section 24 and deduction under section 80C of the Income
Tax Act can be claimed only when the payment is made. If a person fails to make
EMI payments, he cannot claim tax benefits for the same.
4. According to the Income Tax Act, only the person who has taken the loan can
claim tax rebates.
5. The interest on home loans taken for repairs, renewals or reconstruction, also
qualifies for the deduction of Rs 150,000.
6. A husband and wife, both of whom are tax-payers with independent income
sources, get tax deduction benefits, with respect to the same housing loan; to the
extent of the amount of loan taken in their own respective name.
7. If a person buys a house and sells it within the same year/after 3 years, and if any
profit is made, then a capital gains tax liability arises on the same for which the
individual is liable to pay short-term capital gains tax since the sale took place in
the same year. But, if the sale had taken place after 3 years, then a long-term
capital gains tax liability would have arisen.
8. If it is proved that the home loan is simply an arrangement between the loan-
seeker and the builder or with a third party for the purpose of claiming tax
benefits, then tax benefits will not be allowed and benefits, previously claimed,
will be clubbed to the income and taxed accordingly.
9. Tax benefits on interest on housing loans are allowable only for the original loan
and for a second loan taken to repay the first loan and not for subsequent loans.
This means that if you have already availed of one loan to refinance the original
loan and want to now avail a third loan to refinance the second loan, tax rebate on
interest payments will not be permissible. This is because the Section 24 (1) only
talks of the second loan and not of subsequent loans. Even if you take the second
loan at a rate of interest higher than the original loan, you will be eligible for a tax
rebate on the second loan.

Area Conversion Calculator

Try our free land measurement conversion calculators. Use the tools to calculate and
measure the square foot, square yard, acres, guntha, biswa, bighas or square inch volume
of any given area, based on total width and length. The tool gives you the equivalent
values in all other land measurement units used in India.

Instructions: Just enter any one value in the box given below and click on the 'Calculate'
button to get the equivalent values in all the other measurement units!

Area Conversion Calculator

Aankadam Acres

Ares Bhighas

Biswa Cents

Chataks Grounds

Guntha Hectares

Kanal Kottha

Rood Square Feet

Square Meter Square Yards

Note: Click Clear before Each use. Calculate Clear

Buy, Rent & Lease Calculator

Rent calculators help in evaluating different options available with you while going for a
rental property. The tool helps to find how much rent you should pay. It will show you
how much housing benefit and council tax benefit you should get. If you are paying
house rent on a monthly basis, try out the following tool, to calculate how feasible it
would be to purchase a house right away, with the existing burden of paying monthly
installments to the bank coupled with the saddle of monthly rent.

Cost of Home Ownership

Purchase Price (Rs.)

% to be financed
%
Down Payment Required
(Rs.)
Brokerage fee
%

Loan Processing fee

%
 Stamp Duty
%
Other closing Expenses
%

Total Estimated Cost of

Closing (Rs.)
Amount To be Financed
(Rs.)
Fixed Rate Financing
Term Of Loan
in years
Interest Rate
%
Monthly Payment (Rs.)
Annual Cost Of loan
(Rs.)
Other Cost of Home
Ownership (Rs.)
Annual Property Tax
(Rs.)
Annual Insurance
Premium
Total of Other Cost (Rs.)
Net First Year Cost Of
Home Ownership (Rs.)
COST OF RENT
Rent to be Paid (Rs.)
Deposit (Rs.)
Interest On Deposit (Rs.)
Tax Concession on Rent
(Rs.)
Net First year Cost Of
Rent (Rs.)

Abstract:
The case examines the developments in the
housing finance industry in India in the early
21st century. The reasons for the rapid growth
in the industry that gathered pace during the
late-1990s are explored in detail in the light of
the entry of many commercial banks and other
private sector companies into the business.

The case also describes the reasons behind the

emergence of marketing initiatives as a tool
for competitive advantage in the industry. The
possible negative impact of the tax reforms
that proposed to remove the housing finance
related tax benefits in early-2003 are
discussed. The case also provides information
about a few basic concepts related to housing
finance.

Issues:
» Floating and fixed interest rate loans/systems

"The availability of finance has improved significantly these days. Banks and financial
institutions have become aggressive in marketing housing loans."

- Janki Ballabh, State Bank of India Chairman, commenting on the housing finance
industry, in February 2002.

"The feel good factor will dampen."

- Rajiv Sabharwal, Chief Operating Officer, ICICI Home Finance, commenting on

Kelkar recommendations, in December 2002.

An Unwelcome Development
In the early 21st century, the housing industry in India was one of the few sectors that was
growing at a healthy rate of 28-30% in spite of the economic slowdown. A host of
reasons were responsible for this growth, including favorable government policies,
increased corporate activity, and above all, an increasing customer-base.

During 2000-2002, the government had

announced many industry-friendly policies; in
addition, during the same period, real estate
prices had also gone down across the country.
The industry's strong growth had a direct
impact on many other related industries, such
as the cement, engineering, paint and steel
industries. One industry that experienced
hectic activity during the period was the
housing finance industry. In fact, some
industry observers claimed that the ease with
which housing finance could be obtained
resulted in the increased activity in the
housing industry. Not only were customers
given tax concessions on housing loan
repayments, companies were also given tax
rebates on profits earned.

As a result, many banks and financial institutions had entered the market with attractive
financing rates and consumer-friendly schemes. In December 2002, companies as well as
customers were shocked to learn of the recommendations made by a government
appointed panel regarding direct tax reforms.

The panel, named the Kelkar Panel after its

chairman, Vijay Kelkar, recommended that
income tax deductions for interest payments
on housing loans be abolished (Refer Exhibit I
for the Kelkar Committee's
recommendations). Since many salaried
professionals in the country depended on these
very exemptions for reducing their tax
liabilities, the news came as a rather
unwelcome development (reportedly, a large
number of Indians took housing loans to take
advantage of the tax concessions). According
to media reports, the new recommendations,
apart from being against the interests of the
people, could halt the industry's growth if
accepted in the next budget (due in end of
February 2003).

An Unwelcome Development Contd...

This could, in turn, negatively affect the housing, construction and engineering industries.
The housing finance industry was thus in a state of uncertainty in early February 2003.
Both the customers and the companies involved hoped that the panel's recommendations
would not be accepted (or accepted only partially).

Background Note - The Indian Housing Finance

Industry
Since the 1970s, the Indian government had
given special emphasis to the housing industry
and made providing housing one of its main
objectives. However, due to the scarcity of
finance, owning a house remained a distant
dream for the average Indian; even a lifetime's
earnings and investments were not enough to
fund the purchase of a house.

As a result, even by 2001, the country faced a

shortage of 19.40 million dwelling units. The
housing finance industry emerged as the
answer to the problem of housing by
providing finance to individuals planning to
own a house (Refer Exhibit II for information
about the concept of housing finance).

Till then, banks had offered personal loans for properties. But these loans were restricted
to bank and government (public sector) employees. Private sector employees had to
undergo a lot of hardship to obtain housing loans.

To take care of this problem and to boost

investment in the housing industry, the
government established the Housing
Development Finance Corporation Ltd
(HDFC) in 1977.

The objective of HDFC was identified as

'promoting home ownership by providing
long-term finance to households for their
housing needs.'

During the 1980s and 1990s, increased

urbanization and the migration of the rural
population to the cities resulted in heavy
demand for housing. This created a great need
for housing finance...

Wooing the Customers

Till the late-1990s, the marketing efforts of Indian HFCs were rather limited because the
industry was largely a seller's market. Even the market leader, HDFC, had not undertaken
any major marketing initiatives.

The entry of commercial banks and other

private sector companies, however, changed
the dynamics of the industry, and for the first
time, all the players emphasized on marketing.
Many of the HFCs targeted the middle class,
which had begun availing of housing loans
largely due to the declining interest rates.

Analysts pointed out that housing loan

companies needed a strong brand image to
build a strong relationship with these
customers. It was felt that if interest rates
increased in the future, this brand image
would help companies gain/retain their
marketshares. Direct marketing emerged as a
very effective tool for attracting customers in
this industry...

Future Prospects
Many analysts felt that the reduction in tax exemptions would negatively influence the
housing sector's growth since the tax exemptions provided to the salaried class had acted
as one of the main drivers for its growth.

Removing these exemptions would, according

to analysts, lead to a decline in demand,
especially in the Rs 1-2 million loans segment
(reportedly, this segment contributed around
80% of the market). Some industry observers
were of the opinion that the removal of
exemptions could result in the lowering of real
estate prices by companies to attract new
customers. However, others felt that the
acceptance of the Kelkar Committee's
recommendations would not result in a drop in
the cost of real estate because prices had
reportedly touched all-time low. Ashok
Narang, Proprietor, L. Lachmandas and
Company remarked, "There is already an
oversupply situation in most of the big cities
in India. So, the prices are more or less close
to the bottom"...