Some instances when the rent paid is allowed as a deduction while arriving at total taxable income

An individual is allowed a deduction on the rent he pays for the house occupied by him. The relevant provisions are contained under Section 80GG of the Income Tax Act. In computing the total income of an assessee, he is allowed a deduction on the expenditure incurred towards payment of rent for any furnished or unfurnished accommodation occupied by him. The residence should be rented for his own use only.

In order to avail this deduction, the assessee should be self-employed or a salaried employee. The deduction is not restricted to salaried employees only as is the case with house rent allowance (HRA). Further, he should not have received a HRA at any time during the previous year. In case he had received a HRA during any part of the previous year, the deduction under Section 80GG is not available to him. The assessee should file a declaration in Form 10BA furnishing the expenditure incurred by him towards the payment of rent.


However, the Income Tax Department may prescribe other conditions or limitations, regarding the area or place in which the accommodation is situated, after taking into account other relevant considerations.

Normally, most salaried employees get HRA and accordingly the deduction on rent paid is governed by the provisions related to HRA under the Income Tax Act. The biggest advantage of this deduction is that it is available even to self-employed people who stay in rented accommodation.

Amount of deduction is limited to the least of these amounts:

Rs 2,000 per month 25 percent of total income for the year (excluding long-term capital gains and some specified incomes, before allowing deduction for any expenditure under this Section) Expenditure incurred in excess of 10 percent of total income towards rent (excluding long-term capital gains and some specified incomes, before allowing deduction for any expenditure under this Section)

The deduction will not be available to an assessee in case a residential accommodation is owned by him, his spouse or minor child, at the place where he ordinarily resides or carries on his business. Also, the deduction will not be available to an assessee in case a residential accommodation is owned by him at any other place, provided this accommodation is occupied by the assessee, and the concession available for a self-occupied house has been claimed by him under Section 23 for this property. In such a case, no deduction will be allowed on the rent paid, even if the person does not own any residential accommodation at the place where he ordinarily resides or carries on his business.

These provisions enable self-employed people and others not in receipt of HRA to claim deduction on the rental expenses incurred.

Basic steps for those planning to buy a house

Everyone dreams of owning a home. It is a major decision. At one time, people used to buy a home only close to retirement when they had sufficient savings. However, the scenario has changed quite a bit in the last decade or so. Nowadays, people buy a house in their mid to late 20s. In some cases, even before marriage. This could be attributed to many factors. A rise in the earnings of the middle income group, easy financing, aggressive marketing of properties and tax rebates provided by government to promote infrastructure development are some.

Here are some tips to help you buy that dream home as soon as possible:

Planning and research

This is the first step in buying a property. You need to decide on the locality, space-cost factor, flat or independent house etc. It is ideal to make enquiries and research each of these thoroughly. This validates and refines your thinking, and helps in taking the right decisions.


Planning finances

Buying a property is a major financial decision. Often, it happens once in a lifetime. It is always advisable to go in for a housing loan. These loans are easily available and the government offers tax relief to home loan borrowers.
If you are planning to buy a property in the near future, you should plan your finances for an upfront payment too. Usually, a property buyer has to pay 10 to 15 percent upfront from his own resources. A loan covers the rest of the amount. Therefore, it is important to plan and arrange for such an amount if you are planning to buy a property in the near future.
People who are planning to buy a property 2-3 years down the line can look for slow and steady savings through market instruments - mutual funds, systematic investment plans, investing in blue chip stocks etc. However, people looking at buying a property in the next few months should save in debt instruments which safeguard capital.

Loan eligibility

A housing loan disbursement was quite easy a couple of years ago. Housing finance companies have tightened the process a little now due to the slowdown in the economy. However, there is no dearth of options for buyers who plan well. Usually, banks scrutinise these documents to arrive at the loan eligibility of a borrower. People planning to buy a property in the near future should keep them in mind and plan accordingly, to sail through the process of loan disbursement easily.

Documents that go into arriving at loan eligibility:

Tax returns:

Last three years' income tax returns or Form 16 are checked for consistency in earnings. Large variations in income go against the applicant.

Bank statements:

Usually, banks like to verify the last 3-6 months' bank statements. This is to identify various monthly cash outflows of the borrower. People planning to take a loan in the near future should avoid any unnecessary transactions.

Work history:

This is another important aspect. A long stint with the current employer is seen as a positive sign. Similarly, a good reputation and corporate image of the employer creates a positive impact.

Loan history:

Any previous loan default is treated as a serious negative by banks.

Registration must while gifting property - Some conditions to make a valid gift of property

A gift of property may be made within the family by a father to his son, daughter, wife or brother. It can also be made by a mother to her son or daughter and from grandparents to their grandchildren. The gift should be made through a registered document signed by the donor or on behalf of the donor, attested by at least two witnesses. An authorised representative of the donor may also make a gift. The authorisation, i.e., the power of attorney (POA) given to the representative, should be clear about the provision for making a gift. The power of attorney should be properly stamped as per the applicable laws.

A gift has to be made in writing and needs to be registered. A proper gift deed needs to be executed between the donor and the donee. The Transfer of Property Act stipulates that the acceptance has to be made during the lifetime of the donor and when the donor still capable of giving a gift. As the gift deed needs to be registered, the acceptance of the gift is usually recorded on the gift deed itself.

In certain circumstances, a gift can be suspended or revoked. It depends on the contents and conditions of the gift deed. Both the donor and donee must agree to such conditions.

A gift may be cancelled or rescinded on these grounds:

• On occurrence of any event which is specified in the gift deed
• Both the parties should have accepted the conditions and the donee should have agreed to such conditions while accepting the gift
• The proposed event, which suspends or revokes the gift, should be beyond the control and will of the donor
• The condition should not be illegal or immoral There should be absence of any kind of consideration.

Although there is no consideration received against a gift, it attracts stamp duty and registration changes as applicable to a sale deed. However, there is some concession for a gift to family members (spouse, son, daughter, daughter-in-law and grandchildren). The maximum stamp duty is Rs 1,000 and an additional cess of Rs 50 plus infrastructure cess. The registration fee is Rs 500 in such cases.

A document of gift of property is compulsorily registrable. A gift is given on consideration of affection, and no monetary consideration is involved. So, any gift deed irrespective of the value of the property gifted needs registration.

Sometimes, a gift is made to two or more persons and any one of them may not accept the gift. For example, a gift may be made by a father to his son and daughter, and the daughter may refuse to accept the gift. In such a case, where one of the donee does not accept the gift, the gift is not invalid completely. The gift becomes inoperative and void for the donee who does not accept it. The other donee who accepts the gift is entitled to what is gifted to him only. One donee will not have any rights, interests, or title to the property which was not accepted by another donee. Only the portion gifted to a donee belongs to him and the unaccepted portion reverts to the donor.

Some banks are offering low interest rates. With rates plummeting to single digit numbers, homebuyers are expected to make a beeline for fresh loans. The home loan process is an elaborate, usually oncein-a-lifetime affair. Hence, prospective borrowers must employ due diligence and do a thorough homework.

Here are some simple steps to make the process easy to go through:

Step 1: Identify your dream house

Is the house large enough to accommodate an increase in the size of your family at a later date? Is the neighborhood safe? Is it close to your place of work and children's school? Is public transport easily available? Are shops located close by? Finally, verify the property documents. After scrutinising the property documents, it is time to go hunting for a good lender.

Step 2: Arriving at loan eligibility

Banks will lend you an amount based on your income, age, and salary. If you have defaulted on any previous loan, it will impact your creditworthiness. Increase your loan eligibility by clubbing your income with that of your spouse's.
Do not opt for a huge loan that could jeopardise your finances. One must borrow as little as possible.

Step 3: Selecting a lender

A huge interest rate means larger EMI outflows month after month. Shop around for the best rates offered by lenders in the market.
Do not overlook fees and penalties. Often people get so carried away in their quest for lowest rates that they fail to notice other charges levied by the lender. A lender may offer lower interest rate but may have many clauses and fees. Application fees, processing fees, legal charges, valuation charges, switching charges and prepayment penalties are a few to watch out for.
Not all banks lend the same amount of money for an applicant's income level. Different banks have different yardsticks for calculating an applicant's loan eligibility. Is the lender willing to lend you the money you require? See if the bank maintains a good customer relationship.

Step 4: Apply for a loan

Fill in the application form. Here, the lender requires information about your assets liability, personal and professional data, and cost of the property you intend to purchase. Keep the down payment or margin money that is about 10 to 15 percent ready. You will be required to submit several documents to substantiate your claims.
Some banks charge a processing fee of 0.25 to 0.50 percent of the loan amount. The bank evaluates your repayment ability based on the information provided to them.

Step 5: Verification process

The banks thoroughly verify details provided by the applicant. All details including your existing residential address, your place of employment, employer credentials and financial standing are verified.

Step 6: Credit appraisal

The bank evaluates the amount of credit that can be given to the applicant. If some documents are misleading, the lender can reject the loan application. Your repayment capacity is based on your income, age, salary, experience, employer and nature of business.

Step 7: Sanction and offer letter

The bank sends an offer letter that indicates your loan eligibility. It includes loan details including rate of interest, loan amount, tenure and repayment options. You can negotiate the rate of interest with the lender to your advantage.
If you are in agreement with the terms in the offer letter, an acceptance copy must be given to the banker for its records. The banker conducts a legal check on your documents to validate their authenticity. They make a technical valuation of the property too.
The processing fee is not refundable and if your application is rejected, you will in all possibility lose this money.

Step 8: Disbursement

After signing the loan agreement, the bank makes a lumpsum disbursement. The banker usually retains the original documents pertaining to transfer of ownership of property. When a loan is partly disbursed, the bank does not start EMIs immediately. Instead pre-EMI or simple interest on the loan amount disbursed is charged.

Some tips to help you manage your home loan repayment better and plan finances for other needs too

A home loan is a longterm commitment for a borrower. You need to make regular repayments month after month for some 15 to 20 years. When a major chunk of the salary goes towards the loan repayment, other important expenses get overlooked. Planning finances becomes a major challenge. Striking a proper balance between debt repayment, investing for the future and meeting home expenses is critical.

Financial planning aims at meeting your long-term financial objectives. It includes asset allocation, exploring investments, tax planning, retirement planning and risk management. Financial planning first involves computation of your earnings, estimating your future needs to maintain your desired lifestyle and arriving at an investment plan to reach your objectives.

If you thought that your home loan was the only longterm commitment, it is not so. Children's education, marriage expenses, retirement savings, medical bills, unforeseen expenses and emergencies are all major expenses. You may also have other debts like personal loans, credit card bills and vehicle loans. Spending too much of your income and improper management of money, can lead you to a debt trap.

The tenure of any typical home loan is usually long. And owing to inflation and other pressures, a floating rate of interest is bound to go up as years pass by. So, your EMI due to the lender may shoot up, but your salary may not move up by the same fraction. Hence, when planning for repayments keep a considerable cushion for these increases in rates. Uncertainties abound. The health of the economy, inflation numbers, interest rates, your job stability and financial conditions are indeterminate elements. Repayments can become an arduous challenge for many borrowers if no cushion is provided.

The interest rates are showing signs of taming down. If the trend continues you can expect further reductions in rates. Borrowers must make as much down payment as they can, so that the burden of their EMIs will be minimal. Then, opt for floating rates, rather than fixing at the current relatively high levels.

If you were contemplating a vehicle loan or another personal loan, simply postpone to a later date. More debt means more financial obligations. For those already reeling under the burden of rate hikes, acquiring new debts can be an unwise move.

The key to successful retirement planning is to start off quite early and benefit from the power of compounding. Retirement planning acquires even more prominence because the inflation monster is waiting to eat into the money in your savings account. Increased life expectancy and escalating medical costs increase the need for a decent retirement savings.

If you are in a serious unmanageable debt, work out plans to sail out of debt first. This may include paying off high interest loans, paying credit card bills on time and cutting down on a lavish lifestyle. Investments in debt instruments, equity vehicles, balanced funds, real estate, and insurance must be made with due diligence. Adopt a disciplined approach and refrain from the temptation to splurge till your debts are paid off.

Some deductions allowed on capital borrowed to finance the construction or purchase of a house

Under the Income Tax Act, for the purpose of computing income or loss under the head 'Income from House Property', for a self-occupied house, a deduction of Rs 30,000 is allowed on interest on borrowed capital. However, a deduction on interest up to a maximum limit of Rs 1.5 lakhs is available if the loan has been taken on or after April 1, 1999 to construct or acquire a house. The construction or acquisition should have been completed within three years from the end of the financial year in which the capital was borrowed. The higher deduction is not allowed on interest on capital borrowed for repairs or renovation of a house. To claim the higher deduction you should furnish a certificate from the bank to which the interest is paid, specifying the amount paid for the purpose of construction or acquisition of the house.

Apart from the deduction of interest on housing loans, the Income Tax Act also permits deduction under Section 80C to assessees. This deduction is allowed on contributions made for specified purposes. An assessee is entitled to a deduction from the total income on the aggregate of these specified contributions. The deduction is allowed only to individuals and Hindu Undivided Families. Other categories of assessees are not entitled to this benefit. Any sum paid during the previous year by an assessee for the purchase or construction of a house (the income from which is chargeable to tax under the head 'Income from house property') is eligible for the deduction.

These expenses are eligible for this rebate:

Any payment due against a self-financing or development authority scheme, or to a housing board engaged in the construction and sale of houses on ownership basis.

Amount due to any company of which the assessee is a shareholder or to any cooperative society of which the assessee is a member, towards the cost of a house allotted to him.

Repayment of an amount borrowed from the Central/State Government, a bank, a cooperative bank, the Life Insurance Corporation, National Housing Bank or any public company with the main objective of finance for construction or purchase of a house. It also includes the assessee's employer, where the employer is a public company.

The amount includes stamp duty, registration fee and other expenses in connection with the transfer of the house to the assessee. No other payments are eligible for deduction.

These related payments are not eligible for this rebate:

Any amount paid by a shareholder of a company or a member of a cooperative society to become a shareholder or member. Amounts spent on addition, alteration, renovation or repair, which are carried out after the house has either been occupied by the assessee or any other person it has been letout to. In case the assessee transfers the house before the expiry of five years from the end of the financial year in which possession was obtained by him, no deductions are allowed. Further, the aggregate amount of the deductions allowed in the prior years will be deemed to be taxpayable by the assessee in the relevant previous years. The maximum deduction under the Section is limited to Rs 1 lakh

What is PLR and how does it impact home loan interest rates?

PLR stands for prime lending rate. It is the benchmark rate of interest at which banks lend to borrowers. When the Reserve Bank of India (RBI) takes measures to control inflation or liquidity, many public and private sector banks react by raising their benchmark lending rate. This makes home, personal and vehicle loans costlier, dampening credit demand.

Why go for floating rates in these conditions?

To float or get anchored is a vital dilemma for many borrowers at this juncture. Experts point out that rates at this juncture are still high and may drop further down. Since fixed rates are a few points higher than the prevailing floating rates, it makes no sense to get anchored.

When will existing borrowers benefit?

Only a few banks have reduced the interest rates for existing borrowers. In order to entice new borrowers in this dampened climate, low rates are offered to them. So for now, existing borrowers have to wait for rates to fall substantially before the benefit reaches them. Borrowers unhappy with their lenders can consider refinancing with another lender offering better rates.

Bulk buyers will find steel and cement significantly cheaper now. This comes as good news for the construction sector

Some of the sops announced by the government, reduction in service tax, for example, promises to bring some cheer to the realty industry. There has been a cut in duty on bulk cement from 10 to eight percent. The excise duty on steel has been reduced. Also, there has been a cut in service tax rate from 12 to 10 percent in case of rent. This move, coupled with reduction in interest rates, will do the realty industry good.

The reduction in service tax will benefit those who are on rent in large commercial complexes. For example, a tenant paying Rs 10 lakhs as rent annually for an office space would have paid Rs 1.2 lakhs as service tax. Now he saves Rs 20,000 annually.

Excise duty cuts are usually passed on by companies in the form of price cuts or discounts. When the excise duty was cut last time, the steel companies passed on the benefits to their customers.

The sops will have a positive impact on people's sentiments. The duty cut can bring down the cost of construction by around 1.5 percent. This will make a significant difference to large projects.

The reduction in steel prices mean a reduction in the construction costs of a house, and lower input costs. Domestic steel makers have raised the production from the low levels of last quarter of 2008. The reduction in excise duty in the present economic condition will be beneficial. It will increase demand and give a boost to the economy. Steel companies will pass on the excise duty cut to customers.

A two percent cut is significant. After a continuous, steel is currently selling at Rs 26,500 a tonne. A two percent excise cut will mean that prices will fall by Rs 500-600, if companies pass on the full benefit.

The government's move to reduce excise duty on bulk cement from 10 to eight percent will result in a marginal drop of Rs 3-4 per 50 kg bag at the retail level. Prices for bulk buyers, like ready mix concrete (RMC) batching units, will drop significantly. The drop would be between Rs 60 and 70 a tonne for bulk buyers like construction companies and RMC units.

The reduction in excise duties on steel and cement is expected to boost the realty sector, at least to an extent. Both steel and cement constitute essential elements for construction of property. Moreover, as there has been a reduction in excise duty, there are all the more chances that the steel and cement manufacturers will pass these on to the consumers. The bulk buyers will gain in particular, because for them the savings would be enhanced because of volumes

When does EMI change?

In case of a pure fixed loan, the EMI due to the lender remains constant. In case of a floating rate loan, the EMI moves up or down depending on the bank's benchmark lending rate. When a lender increases the interest rate, either the tenure of the loan is increased (and EMI kept constant) or EMI is increased (and tenure kept constant).

Some banks offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by. In step-down loans, EMI is high initially and decreases as years roll by. Stepup option is convenient for borrowers who are in the beginning of their careers and hold a tremendous growth potential. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

What determines EMI?

Banks arrive at EMI based on:

• Total amount borrowed,
• Tenure of the loan,
• Rate of interest and
• Computation method.

When a borrower takes a larger loan, his EMI outflow is bigger. In the current scenario of volatile rate fluctuations, it is prudent for borrowers to make as much down payment as possible. Thus, they must borrow as little as possible. EMIs are heavily tilted towards interest repayments during the initial years.

What is monthly reducing method?

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly rests, interest is computed on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month. In case of annual rests, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

How does tenure affect cost of loan?

Longer the tenure of the loan, lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your debt clears faster. Borrowers who are in a debt trap generally increase their loan tenure. This way, their EMI burden comes down. But longer tenures can drain larger interest towards the loan and make it expensive.

What is amortisation schedule?

This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero.