In a move to boost affordable housing segment Finance Minister Nirmala Sitharaman on Friday raised tax deduction limit to Rs 3.5 lakh on interest paid on housing loan sanctioned during this financial year for purchase of first home worth up to Rs 45 lakh. The government will also initiate reform measures to promote rental accommodations and will finalise and formalise tenancy law to states, the minister said.

In her first Budget, Ms Sitharaman announced that 1.95 crore homes will be provided to eligible beneficiaries till 2021-22 under the Pradhan Mantri Awas Yojana - Gramin (PMAY-G). The regulation of housing finance companies will now be done by the Reserve Bank of India instead of the National Housing Bank, she added.

In order to align definition of affordable housing under the Income Tax Act with GST Acts, Ms Sitharaman proposed to increase the limit of carpet area from 30 square metre to 60 square metre in metropolitan regions and from 60 square metre to 90 square metre in non-metropolitan areas. The cost of the affordable house has been fixed at Rs 45 lakh and below.

The finance minister said the interest paid on housing loans is currently allowed as a deduction to the extent of Rs 2 lakh.

"In order to provide a further impetus, I propose to allow an additional deduction of up to Rs 1.5 lakh for interest paid on loans borrowed up to March 31, 2020 for purchase of an affordable house valued up to Rs 45 lakh," she added.

The minister elaborated that a person purchasing an affordable house will now get an enhanced interest deduction of up to Rs 3.5 lakh. "This will translate into a benefit of around Rs 7 lakh to the middle-class home buyers over their loan period of 15 years."

As per the budget document, this interest deduction will be subject to condition that the loan has to be sanctioned during the current fiscal only. The home buyer should not have any other residential property in his name on the date of sanction of loan.

To achieve the goal of ''Housing for All'' and affordable housing, Ms Sitharaman said a tax holiday has already been provided on the profits earned by developers of affordable housing.

Ms Sitharaman proposed that several reform measures would be taken to promote rental housing.

"Current rental laws are archaic as they do not address the relationship between the lessor and the lessee realistically and fairly. A Model Tenancy Law will also be finalised and circulated to the states," she added.