How our goverment gives undue incentive to home buyers

In last two posts(1 and 2) I wrote about our love for house and its consequences for the economy, but you are not the only culprit. You are conspired to fall in that trap by the number of undue incentives provided by the government or tax authority of India. The nexus of real estate industry and law makers are hand in glove to incentivize the whole process to turn the most part of surplus income to real estate.

First, you get a tax exemption on the 1st house(where you leave in) for the interest on the loan to the tune of Rs 1,50,000 per year. We don't get such exemption in any other loan except education. The argument can be to help people buy their home, check the next point. In all loans we pay interest which is the income for the bank which is also taxed, so we should get tax exemption on all loan interest or the exemption should be abolished for all loans(except education loan which I feel is justifiable). We can argue even a car or fridge or personal emergency(personal loan) is equally important, but we don't get any incentive for those loans. In addition to that you also tax exemption for the principal repayment of Rs 100000 per year.

Second, when you buy the second house(and give it on rent), you can claim the whole interest on loan for tax exemption. Not only that, If your income from the property(through rent) is less than the interest paid per year, you can offset that loss with your any income. No loss from any other financial transaction is allowed to be offset with any other income, like short term capital gain tax from equity trading is only allowed to offset with income from same source in future years. If tax exemption is for providing a house to common man, there is no need of these incentive for the second house. So people after buying one house buy one more and so on.

Third, house loan interest is the lowest among all type of loan. You won't get a car loan or personal loan in that range, not even a business loan which can employ some people and even the poorest of poor take micro-finance loan at twice or thrice the rate. Because our banking system considers a house loan with the house as collateral is much safer than any other loan.

The last but not the least, you can save the capital gain from selling a house after three years of possession by purchasing another house.

As a result real estate investment has become so lucrative and you benefit more If you purchase more(like your second house or third house). Everybody knows real estate is the largest beneficiary of black money and that also keeps the price high. So slowly the bubble is building up in the sector and no government or policy makers going to disturb this equilibrium which employs and benefits so many people. But we know how dangerous can be a housing bubble unless it is controlled at the right time. My only point is be sensible while buying your house, one of the most emotional investment of lifetime.


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