Why Chidambaram thinks a home loan can be part of a savings plan

Former Finance Minister P Chidambaram on Sunday asked Finance Secretary TV Somanathan to re-examine his theory on housing loan.

The senior Congress leader was referring to Somanathan’s recent media interview, where he said a housing loan is not a saving from the macroeconomic aspect but “merely a push towards certain things”.

“The Finance Secretary asks, ‘Is the housing loan a saving?’ His answer is ‘No’. I wonder how many people will agree with the Finance Secretary,” Chidambaram said in a series of tweets. He then went on to explain how a housing loan could be a part of saving.

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He tweeted: “The payment of interest and the instalments of the loan is indeed an expenditure, but it is expenditure which is converted into an asset, which is a saving.”

Chidambaram elaborated further with another tweet, saying, “Suppose you spend the same money on a holiday or at a race course: there will be no asset at the end. The Finance Secretary should re-examine his theory that a Housing Loan is not a saving.”

What Somanathan said

Somanathan made the observation on the housing loan while explaining the difference between the new and old tax regimes. He didn’t agree to the point that the old tax regime encourages savings.

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“If you look at the structure of the tax deductions, half of them are for savings and half of them are for dis-savings like housing loan or interest on housing loan. Is the housing loan a saving? So overall macroeconomic impact, it’s not a savings push at all but merely a push towards certain things. Government wants you to do housing, insurance or pension. But it’s not necessarily a savings push or influence the savings rate in the country,” he told The Hindu.