How to get tax breaks for investment in housing

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Published: July 8, 2016 6:02:53 AM

One should understand the tax withholding obligations. Any payment made by the purchaser of property to a resident exceeding Rs 50 lakh is required to be subject to a tax withholding at 1%

One should understand the tax withholding obligations. Any payment made by the purchaser of property to a resident exceeding Rs 50 lakh is required to be subject to a tax withholding at 1%One should understand the tax withholding obligations. Any payment made by the purchaser of property to a resident exceeding Rs 50 lakh is required to be subject to a tax withholding at 1%

Since Investing in house property, is more often than not, a sentimental decision. The tax laws provide for tax breaks to encourage investments in house property. Understanding the tax breaks available and making the right choices to leverage on the tax cost could go a long way in reducing the total tax cost.

Each joint owner is eligible for a deduction of Rs 2 lakh in respect of interest expenditure on self-occupied property. Where the individual and the spouse jointly invest in a property, it is important to clearly document that the property is owned by both and the EMI is borne by both the individuals to leverage on a total deduction of Rs 4 lakh towards interest payments.

While principal repayments are eligible for deduction only when the loan is availed through a financial institution, interest repayments can be claimed at actuals irrespective of who the lender is. While buying a house, a significant amount of funding is obtained through informal sources (parents, siblings, etc) and availing tax breaks for the related interest cost with suitable documentation is well within the provisions of the tax laws.

For salaried employees, these tax deductions can be considered by the employer at the time of withholding, and hence declaring this information to the employer in a timely manner can help employees reduce the tax cash outflow.

The above deduction of Rs 2 lakh for self-occupied property was restricted to Rs 30,000 where the construction is not completed within three years. Sensitive to the delays in construction, the government has now extended this period to five years with effect from the financial year 2016-17.

The 2016 Budget has liberalised tax breaks for housing. The additional deduction of Rs 50,000 available to home buyers in respect of property purchased during financial years 2013-14 and 2014-15 is now extended to FY 2016-17. The benefit is available to individuals not owning any residential property, for the purchase of first residential property where the value of the property purchased does not exceed Rs 50 lakh and loan sanctioned for the same does not exceed Rs 35 lakh.

This deduction is in addition to existing interest deduction of Rs 2 lakh available for self–occupied property. Further, until now the additional deduction of R50,000 was available only for one year i.e. the year of purchase. However, with effect from the financial year 2016-17, this additional deduction can be claimed for all the years till the loan is outstanding.

It is also important to understand the tax withholding obligations placed on the buyer of a property. Any payment made by the purchaser of property to a resident exceeding Rs 50 lakh is required to be subject to a tax withholding at 1%. However, non-residents were required to obtain a NIL or lower tax withholding certificate based on which taxes were to be withheld by the buyer. In order to obtain such certificate, obtaining a PAN was mandatory, as otherwise non-residents were subject to withholding at 20%. There has been a recent relaxation on tax withholdings relating to sale of property by non-residents dispensing with the mandatory requirement of PAN with effect from 1 June 2016.

The Real Estate (Regulation and Development) Act, 2016 is a major step towards protecting home buyers and boosting investments in real estate. In case of delay in completion of projects, liability imposed on the developer to pay interest to the consumer, is a welcome move.

Further, this Act obliges the developer to park 70% of the project funds in a dedicated bank account. This will ensure that developers are not able to invest in numerous new projects with the proceeds of the booking money for one project, thus delaying completion and handover to consumers.

The writer is a partner with Deloitte Haskins & Sells. Inputs from Vijay Bharech, manager, Deloitte Haskins & Sells

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