“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)
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