Oct 3, 2008

8 Tax Considerations to Remember before Buying a Home

“The hardest thing in the world to understand is the income tax.”

– Albert Einstein

OF COURSE, tax provisions are a bit complex, but so is life.

This blog is making an attempt to simplify the complex tax laws and present them before you in an easy-to-understand manner.

Here is a list of eight tax points you need to keep in mind before making a decision to invest in a house:

1. Notional rental income of second home is taxable
In case you are buying your second house, remember that its notional rental income is taxable even though you use it for your own self-occupation because for tax purposes only one house is allowed for self occupation and all others are deemed to be let out. Therefore, although there won’t be any income, you will still be asked to pay tax on notional rental income.


2. Wealth tax is applicable on more than one house
If you own more than one residential house, you are liable to wealth tax.

A residential house (subject to exemption of one) is considered as an asset under Wealth Tax Act, 1957 and you are liable to pay wealth tax in case your net wealth including the residential house(s) is more than Rs 15 lakh.

However, in case the residential house(s) is let-out for more than 300days in a financial year (FY), it is not considered as an asset for the purpose of wealth tax.

Furthermore, commercial property is also completely exempt from wealth tax, that is, you can own any number of commercial properties without worrying about wealth tax.


3. Interest benefit not allowed till the house is acquired/constructed.
Pre-acquisition/Pre-construction period interest is also allowed but only after acquisition/construction is complete. It is allowed in 5 equal annual instalments starting from the FY in which acquisition/completion is completed.

It is pertinent to note the following three points:

a) In case of a self-occupied house property, the total allowable interest in any FY cannot exceed Rs 1.5 lakh even after including the 1/5 portion of pre-construction/ pre-acquisition period interest.

b) The interest for whole of the financial year (FY) in which completion / acquisition is completed is treated as current interest. For instance, let’s say you borrowed money in January 2007 and got the house completed in the month of March 2008. In this particular case, only interest for the period Jan’07 to Mar’07 will be treated as pre-construction period interest and will be allowed in 5 equal annual instalments starting from the FY 2007-08. If instead of Mar’08, the construction of the house got completed in, say, May’08 then the interest up to Mar’08 will be treated as pre-construction period interest. In other words, you will start getting interest deduction benefit only from the FY 2008-09 instead of 2007-08.

c) There is no such condition under section 80C for allowability of principal repayment i.e., as soon as you start repaying the loan you are entitled for deduction for the principal part of the EMI under section 80C, irrespective of completion of acquisition or construction.

4. Acquisition or construction after 3 years from the end of FY in which capital borrowed
In case you are not able to complete the acquisition/ construction within a period of 3 years from the end of the FY in which money is borrowed, then the maximum limit of Rs.1,50,000 gets reduced to Rs 30,000. This restriction is applicable in case of self occupied house property only. In other words, the ‘let out’ or ‘deemed to be let out’ properties are allowed the actual interest paid without any restriction, even if the acquisition or construction is delayed beyond 3 years.


5. Interest is a cost borne by you
If you are going for home loan just to save on taxes even though you can self finance it, please remember that interest – like tax – is a cost borne by you.


6. In case of joint loans, co-borrowers need to be co-owners
In case you have gone for joint loan to increase the loan eligibility, remember that it is essential for co-borrowers to be co-owners in order to claim tax benefits.


7. Buying a plot of land
As vacant land is not considered a house property; therefore, there are no income tax implications, that is, from income tax point of view, you can invest in any number of plots without having to bother about income tax.

However, you also lose the tax breaks in case loan is only for the purpose of buying a plot of land.

Moreover, under Wealth Tax Act, 1957, urban land is considered an asset except for the exemption provided to one plot of land measuring not more than 500 sq. meters in area. But remember that this exemption is available only if you are not claiming any residential house to be exempt. In other words, if you already have a residential house which you are claiming as exempt, then you can’t claim a plot of land to be exempt under Wealth Tax Act.


8. Selling before 5 years
If you are buying the house for investment purposes and intend to sell in the very near term, just remember that if you sell it before the expiry of 5 years from the end of the FY in which possession is obtained, in addition to LTCG/STCG, the tax deduction under section 80C which you availed in all the earlier FYs will be deemed as your income.


Also See:

1. Section 80C - 10 Smart Tips
2. 4 Ways to Claim HRA & Home Loan Tax Benefits
3. Section 80C - Tax Saving Options
4. Home Loan Interest Rates - Fixed vs Floating

5. Home Loan Tax Deduction - Section 80C vs 24(b)

21 comments:

  1. I wanted to know that if it is manadatory to be a coapplicant for a home loan if you are a co owner.

    ReplyDelete
  2. For availing tax benefit u/s 24 on interest paid on joint home loans, co-borrowers need to be co-owners as per section 26 of the IT Act, 1961. But, there is no requirement under tax laws that co-owners need to be co-borrowers.

    Nevertheless, banks / HFCs insist that co-owners need to be co-borrowers / co-applicants (but co-applicants need not be co-owners)for the purpose of home loans.

    ReplyDelete
  3. Is the notional rent applicable also in cases where the two houses are in different cities? I have a flat in kolkata. I am now thinking of buying another in delhi where i now work.

    ReplyDelete
  4. Yes, it is applicable. Location of the property doesn't matter.

    ReplyDelete
  5. Hi I'm in a somewhat unique / twisted situation. I took a home loan and started paying EMI (and not pre-EMI) from Oct 2006. Till date the acquisition/construction is not complete as the builder delayed the apartment by years. I live in the same city on rent. Now the builder promises that possession will be given before 15th March 2010. I have not claimed any benefits on Principal under Section 80C in any FY as my limit of 1 Lac was getting exhausted by PF, LIC contributions itself. I could not take benefit on interest under Section 24 either as acquistion was not complete but I did claim HRA all these years.

    a) Please let me know if I lost money by not claiming the right IT deductions / exemptions so far that I could have saved?

    b) For the current FY can I claim HRA till March, then take possession in late March 2010 and then avail of tax benefit u/s section 24 on interest paid on home loan all the way till limit of 1.5 lacs?

    c) My wife and I are co-borrowers of the loan and will be co-owners of the apartment in March 2010. I pay 100% EMI through my account though. If answer is yes to point b) above, how much interest deduction can I claim for my IT return? Can it be full 1.5 lacs as my wife did not work for most part of this FY.

    Thanks a lot in advance.

    ReplyDelete
  6. Hey man, it’s really bad! You’re asking such a big question without even mentioning your name.

    Anyhow, the answer to your home loan query is (assuming that you availed the house loan during the FY 2006-07:

    1. No, you didn’t lose any money by not claiming any tax benefits on home loan EMI’s paid till last FY.


    2. Yes, you can claim HRA irrespective of whether you’ve a home loan or not. You can also claim interest deduction u/s 24(b) of IT Act presuming you occupy your house soon after getting the possession. If not, then following two conditions need to be satisfied to claim the benefit of a self-occupied house (otherwise it will be deemed to be let out)

    a.) Your rented house should not be in the immediate vicinity of your own house.

    b.) The staying in the rented accommodation should be due to professional / employment or business reasons.


    3. In case of Joint borrowing and ownership, the deduction u/s 24b for interest paid on the home loan can be claimed only on proportionate basis in accordance with share in the ownership irrespective of who’s paying the EMI’s.

    However, know that you’re also entitled to claim 1/5 of the pre-construction period interest (i.e., interest paid up to 31st March 2009), but with in the maximum limit of Rs 1.5 lakh.

    ReplyDelete
  7. i have purchased a flat in 2007 and want to sell it off now......i understand that if it is sold off before 5 years, the entire principle amount in last years i have taken u/s 80C will be revert back as income....but if there is any remedy on this?

    ReplyDelete
  8. Sachinguha: Sorry, there's no way out of it.

    ReplyDelete
  9. Hi Fisher,

    I have around 15 lacks in hand...is buying property with added loan the best decision, i pay around 40k incometax per anum apart from declaring 1 lack under 80c.My age is 25 and i am open to any other kind of investment.

    Regards,
    Shashaank

    ReplyDelete
  10. Shashaank,

    Sorry for the delay. I think the topic deserves a lengthy discussion.. requires more than a simple yes or no. So wait for a day or two.. i’ll publish a new post answering your query.

    ReplyDelete
  11. Sure Fisher ...appreciate your time.

    ReplyDelete
  12. I am planning to take Home loan from My wife. Is the interest paid to my wife is tax deductible from my Income under section 24(b).

    ReplyDelete
  13. Hi,
    Actually in my case, possession of flat was done in October 2003 and I was staying in that flat on rent from Sep 2007 till Aug 2009. In September 2009 I purchased this flat . I applied for Rs 23L loan from HDFC Limited and they disbursed me Rs 22.90L as they need Mutation and Permission to Mortgage certificate from Ghaziabad Development Authority. Because of these documents loan was not fully disbursed and I was paying the Pre EMI it is not the case of full construction of the flat was not done.
    Now, I submitted the documents and my full EMI will start from March 2010 onwards.

    I paid six Pre EMI before submiting the documents so i want to will i get the full tax befit on pre emi in this particular case.

    Ajay

    ReplyDelete
  14. Ajay / Manu,

    Yes, you're entitled to get deduction u/s 24 for the entire interest paid because the EMI's are post-construction and not pre-construction as per the IT Act.

    ReplyDelete
  15. Hi FIsher,

    I already own a house and this question is related to my second house. I have booked an apartment in my name as sole owner. But for the purpose of loan, the bank wants me to add my wife's name as a co-borrower even if she is not a co-owner. How can i ensure that I claim the entire tax benefits since my wife is a housewife? Can I do so by paying the EMIs from my individual account?

    ReplyDelete
  16. Prabhat,

    As you’re the sole owner, you’ll get the full tax benefit. Yes, you should pay the EMIs from your individual bank account.

    ReplyDelete
  17. Hi I have booked a flat in the same city where I also stay in rented house. Flat is under construction and expected to be handed over in this financial year Dec'10 FY10-11. I am paying home loan EMI for the Flat where interest component aprox Rs.2L and principal is 95K. I am also claiming HRA for my rented accomodation.
    Queries are :

    1. I already have PF + insurance cover under 80C more that Rs 1L. Is there any way this Rs95K principal amount of home loan helps me to get any tax benefit ?

    2. Can I claim interest benefit along with HRA right now ? or I have to wait to get the possession letter of the flat to claim the interest component max upto 1.5L. i.e HRA can be claimed upto Nov'10 and full 1.5L interest benefit can be claimed thereafter in FY10-11

    3. My wife is a co-owner and co-borrower. Can she claim the balance interest part (> Rs1.5L) under 24b while she files her tax claim ?

    ReplyDelete
  18. i have taken loan in september 2009 & has not taken possession till date ,however the construction is almost complete & i want to let out the property . My employer has not considered for the loss due to house loan since i have not submitted possession letter .
    I i take possession in jun 2010 then how can i claim the interest part for sep 09 to jun 2010 ,It is given in your post that it can be claimed 1/5th in 5 years is that mean that if i am having Rs 60000 as the interest from sep09 to mar09 then i can claim 12000 per year till 5 finencial years along with the interest paid in aparticular finencial year .
    If i can show that my house was completed (possession not taken )in sep09 then can i claim the full interest from sep09 to mar09 externally for refund in ITR .

    ReplyDelete
  19. I own a house in kalyan for which I am paying home loan in EMI's Loan Inetrest is 83000 for the year on reducing basis.
    From Income tax point of view we can claim the interest up to 150000/year.
    Now I want to buy a second home,so question is Can I claim the interest of second home loan from HDFC also as as per income tax guidelines we can claim the home loan interest up to 150000?

    Sandeep

    ReplyDelete
  20. Can I claim the interest of second homeloan as first one is still on going? I pay the interest up to 85000/year?

    ReplyDelete
  21. i have taken a loan of 12 lakh for buying a PLot(only land)
    till now i have not got possession of that plot
    right now i m paying pre emi interest on principal amount of loan
    am i entitled to any kind of tax deduction on emi i have paid??

    ReplyDelete

You’re welcome to post a comment if you’d like to air your views, or if you’ve any further question to ask, but please stick to the topic and don’t forget to write your name.