INCOME TAX ON PROPERTY: A READY RECKONER One of the most appealing
reasons to buy property is the tax benefits that can be derived.
Investments in property offer triple benefits: capital appreciation, tax
exemptions and rental income, if applicable. Additionally, the
financial burden that comes with a housing loan is easily offset with
the tax benefits, which we'll examine case by case.
HOUSING LOAN
Housing
loan is a significant tax saver because both the interest and principal
components offer better tax benefits. Under Section 24 of the Income
Tax Act, a maximum of Rs 1.5 lakh can be deducted from taxable income.
The principal component of the loan availed can be claimed subject to a
maximum ceiling of Rs 1 lakh under 80C. To claim these benefits, the
property has to be constructed or acquired within three years from the
end of the financial year in which the capital is borrowed. Another
important point is that home loan interest is deductible on an accrual
basis. The tax benefits are not only available for home loans from banks
and financial institutions but also applicable for loans from other
sources like friends and relatives for home renovation, construction etc
if you have valid proof. However, the benefit allowed here is only for
the interest portion.
SECOND HOME
Many people buy more
than one property without understanding the tax implications. If you own
two properties, one will be deemed to be let out even if actually it is
not. Tax is applicable on the notional rental income for the property.
For a second home loan, there won't be any tax benefit on the principal
repayment of the loan. Further, the additional house owned is taken for
computation of the total wealth for the purpose of computing wealth tax.
A wealth tax of 1 per cent is payable on the amount exceeding Rs 30
lakh.
RENTAL INCOME
In case if the second property is let
out, municipal taxes and 30 per cent of the total rental income can be
deducted from tax. In addition, a full deduction of interest paid
against home loan is also allowed against the rent. For example: If X
lets out his property and earns Rs 25,000 per month as rental income,
his annual rental income would be Rs 3 lakh. If the property tax for the
year is Rs 10,000, and the maintenance cost Rs 90,000 (30 percent of
the rental income) is deducted from the rental income, his taxable
income would be Rs 2 lakh only. If he is having a home loan of which the
annual interest portion comes more than Rs 2 lakh, the entire rental
income will become tax free. Apart from this, the Direct Taxes Code,
which is expected to be implemented in the next financial year, might
exclude the principal component.
PROPERTY UNDER CONSTRUCTION
For
a property under construction that is acquired through a loan, the
interest paid on the principal during the construction period can be
claimed for tax benefits. The principal portion that gets repaid before
completion is excluded for deductions under 80C until the property is
acquired.
BUYING LAND
If you are planning to buy a land,
an important point to keep in mind is that there is no tax benefit
associated with land purchase loans, even if it is let out.
COMMERCIAL PROPERTY
Commercial
properties are exempt from wealth tax, and not included in calculating
the wealth of a person. But it is imperative to note that a commercial
property is not eligible for deduction under Section 80C.
CAPITAL GAINS
When
a property is sold for a profit after three years from the date of
purchase, it becomes a long term capital gain, and it is taxed at the
rate of 20 per cent with indexation benefit. This capital gains tax can
be avoided if the total proceeds of the sale are completely invested in
any residential property or in REC/NHAI bonds. Tax exemption is
applicable if the total amount is invested in residential property
within two years or in the construction of a residential property within
three years.
JOINTLY-OWNED PROPERTY
If a husband and wife
take a joint home loan, both of them can claim tax exemption
individually based on their respective shares in the loan. To claim tax
benefits, all co-borrowers have to be co-owners.
HOUSE RENT ALLOWANCE
Many
people have a misconception that house rent allowance (HRA) benefits
are applicable along with the income tax deductions. If you are living
in an 'own' house which is bought with a home loan, you are eligible
only for tax deductions under Sections 24 and 80C. But if you have
availed a loan to construct a house and live in a rented house, you are
not eligible for any tax rebates but for HRA benefits. On the other
hand, if you have rented out your house and live in a rented house, you
are eligible for both income tax benefits and HRA benefits but the
rental income will be added to your taxable income. -
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