Middle-class home buyers have reason to cheer Chidambaram’s election year Budget. The finance minister proposed that any person taking a loan of up to Rs 25 lakh for a first home will be allowed an additional tax deduction on interest of up to Rs 1 lakh.

At present, tax payers are allowed to set off interest payments up to Rs 1.5 lakh against their taxable income. This, he said, will promote home ownership and give a fillip to a number of industries like steel, cement, brick, wood and glass, which are directly linked to the real estate sector, besides providing jobs to thousands of construction workers.

“This will help boost housing sales in tier-2 and 3 cities and peripheral areas and distant suburbs of metros, but not within the metros, where housing is targetted more towards the mid- and upper-income segments,” says Anuj Puri, chairman & country head, Jones Lang LaSalle India. Home sales have taken a dip on account of high prices, interest rates and a poor economic environment.

The deduction limit should have been on loans of at least Rs 35 lakh to have a significant impact, says Anshuman Magazine, chairman and MD of CBRE South Asia.

To improve demand for homes, especially in the budget and affordable segments, and to kickstart the economy, the Budget has proposed that the National Housing Bank start an Urban Housing Fund with an initial allocation of Rs 2,000 crore in 2013-14. It also provided an additional Rs 6,000 crore for the Rural Housing Fund.

“These funds will be utilised to give refinance to banks, housing finance companies and RRBs for their retail loans in urban areas, and the thrust will be on lower loan slabs,” says RV Verma, chairman of NHB. This new demand will drive creation and supply of new homes in both rural and urban areas. The Budget, though, has been unkind to luxury home buyers.

The finance minister has reduced the abatement on service tax — availed of by real estate developers — to 70% from 75%. This applies to homes above 2,000 sq ft or costing Rs 1 crore-plus.