Every Indian desires owning a home. It is triggered by not only the capital appreciation expected in the years to come and the steady rental income, but also the satisfaction that comes with owning a house.
The government also promotes investment in house properties as it acknowledges the need for housing for all and the employment generated by the real estate sector. Hence, the government has rolled out various tax incentives for investors in a house property.
The income-tax provisions allow for a person to have one self-occupied property without paying any taxes. Additionally, the interest on home loan taken is allowed as a deduction up to Rs 200,000 and principal repayment up to Rs 150,000 is allowed as a deduction from income. Further, for the ‘first-time home buyers’ in financial year 2016-17, an additional interest deduction of Rs 50,000 per annum is allowed if loan does not exceed Rs 35 lakh and value of the house does not exceed Rs 50 lakh.
In today’s times we often see that both spouses are working and take a joint loan for buying a home. In this case, the aforesaid deduction of up to Rs 150,000 for principal repayment and up to Rs 200,000 for interest payment is allowed for both the spouses. However, it is essential that the actual investment should be made by both spouses to claim the aforesaid deductions.
Given that the real estate prices have sky rocketed in the metro cities, it may not be feasible for a normal salaried person to buy a house in a metro city. In this scenario, buying a house in one’s native place/outskirts of the city seems more achievable. One may therefore choose to buy a house in another city/town and stay on rent in a metro city. In this scenario, a deduction is allowed for the interest and principal repayment on housing loan and an exemption for house rent allowance is also allowed in respect of the rent paid.
The tax incentives are higher if the property involved is rented out. Though the limit of deduction for principal repayment remains R150,000, the limit of R200,000 for interest payment is eliminated. This translates into a deduction for the entire interest payable on housing loan and often results in a loss from house property which can be set-off against income from salary and income from other sources, thereby reducing the overall tax liability. Further, if such loss is not set-off during the year, it can be carried forward for eight years for set off against future income from house property.
Even if an under-construction property is booked and the equated monthly instalments commence before completion of the house, the total interest paid before completion of the house property is allowed as a deduction in equal instalments in each of the first five years starting with the year in which house property is completed. This is, however, subject to the overall limit of R200,000 per financial year.
If an individual owns two house properties and both are vacant, the individual can choose which house should be treated as self-occupied and which house should be deemed to be let out subject to satisfying the prescribed conditions. Say, Rajesh Kumar owns two self-occupied house properties — one in Mumbai (purchased with home loan) and other one in Pune (self-financed). In these circumstances, Kumar may choose Pune property to be self-occupied and pay tax on deemed rental income in Mumbai, upon which he will be allowed a deduction of the entire interest paid on the Mumbai property.
It is also to be noted that the deduction of interest is available not only when home loan is taken from banks, but also if home loan is taken from the employer or friends (subject to a certificate to this effect). However, deduction for principal repayment is allowed only for loans taken from financial institutions and specific employers.
Sale of a house property ordinarily attracts capital gains tax. However, if the house is held for more than three years and capital gains are invested in a new residential house an exemption can be claimed for such gains. For instance, Pradeep Singh had bought a house property in 2010. But, with change in the family dynamics, he wishes to sell his one bed room flat and buy a two bedroom flat this year. He knows that sale of house property invites capital gains tax on the difference in sale price and purchase price. In order to save the tax on such long capital gains, he will have to invest the entire gains from sale of house property in a new house property. The time allowed to invest in another property is one year before or two years after the date of sale. He could also construct another residential house property in India within three years of sale. To encourage investment in a residential house, even if any other long term capital asset is sold, deduction is allowed if the investment in house is not less than the net consideration in respect of the original long term asset (subject to conditions).
In view of the above, it can be inferred that investing in home paves the way for saving in taxes.
The writer is partner, Deloitte Haskins & Sells. With inputs from Mousami Nagarsenkar, senior manager and Hiral Tanna, deputy manager, Deloitte Haskins & Sells