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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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