The Government of India (GOI) may modify the draft direct tax code to retain tax shelters on interest and principal repayments for home loans to make the proposed new code more attractive for the average Indian, a finance ministry official told The Economic Times. The proposed direct taxes code, which has been unveiled for public debate and is due to become operational from April 2010, does not provide tax incentives to loan-funded house purchases that are for personal use.

At present, taxpayers are allowed to deduct from their income the interest paid on home loans to a maximum of Rs 1.5 lakh every year. In addition, the repayment of the principal amount is also allowed to be included within the rebate available under section 80C, which has a maximum limit of Rs 1 lakh.

The draft code, billed as a comprehensive reform of the direct taxes regime, has suggested increasing the exemption limit under section 80C to Rs 3 lakh, but the list of eligible expenditure/savings does not include the principal payment. The code also restricts the interest deduction only to in respect houses rented out and where such income is included in the income of the assessee. At present, if a home buyer in the highest 30% tax slab were to avail the maximum tax exemption available on home loans then government loses over Rs 77,000 in tax.

The planned move to discontinue tax benefits for housing has faced widespread criticism and the finance ministry official said that they are looking at provisions (in the direct taxes code) that concern common man directly, including tax incentives to housing.

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