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 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.
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.
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