Here are some rules that specify when a tax deduction is available

Property is an important source of income. In case you own a residential property, it may either be self-occupied or rented out. If you rent out the residential property, a rental income is derived. Leasing out property and renting out property mean the same. The rental income earned is taxable in the hands of the recipient. It is taxable under the head 'Income from House Property'.

The tax liability is calculated according to the provisions of Sections 22 to 27, after allowing for the admissible deductions. No deductions are allowed except those specified by the Income Tax Act.

In case you have rented out your commercial property, the income earned from this source is also be taxable. It is taxable under the head 'Income from Business and Profession'. The lease rent earned through leasing out commercial property constitutes business income for the owner of the property. As such, it is taxed as business income.

The deductions allowed on business income are applicable here too. The expenses should pertain to earning the income from the commercial property.
In addition to the regular income from rent, you can also earn an income through capital appreciation. The owner may transfer or dispose off a residential property. In case the price realised is greater than the cost of the house, you earn a capital gain. This is taxable under the head 'Capital Gains'. In case the amount realised is reinvested in property or some specified securities, no amount is taxable.

What is taxed under the head 'House Property' is the inherent capacity of a property to earn an income called the 'annual value' of the property. This is taxed in the hands of the owner of the property. Gross annual value is the highest of rent received, fair market value or municipal valuation. If however, if the Rent Control Act is applicable, the gross annual value is the standard rent or rent received, whichever is higher.

In case the let-out property was vacant for any part of the previous year and owning to such vacancy the actual rent received is lesser than the sums mentioned, the amount actually received is taken into account while computing the gross annual value. Net value is the gross annual value less the municipal taxes paid by the owner, provided the taxes were paid during the year. Annual value is the net value less the deductions available under Section 24.

Deductions under Section 24

The Act specifies deductions that are exhaustive in nature. No deductions other than these are available. They include:

• Percentage of annual value

It is specified that 30 percent of the annual value of the property as computed is eligible for deduction.

• Interest on loan

Interest on money borrowed for acquisition, construction, or renovation of property is deductible on accrual basis. Interest paid during the pre-construction or acquisition period will be allowed in five successive financial years starting with the financial year in which construction or acquisition is completed. This deduction is also available for a self-occupied property and can be claimed up to a maximum of Rs 30,000.

The Finance Act, 2001 had provided that effective the annual year 2002-03, the amount of deduction available under this clause is Rs 1.5 lakhs in case the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition or construction is completed before April 1, 2003.

The Finance Act 2002 has removed the requirement of acquisition or construction being completed before April 1, 2003 and has simply provided that the acquisition or construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed

A further drop in home loan interest rates is expected as the inflation rate is under control now

Many are facing is facing a dilemma and they have identified a lavish apartment in the heart of the city. The developer has promised him a bargain deal. Before he approaches a lender, Narsimha has to decide between floating and fixed rates. The unpredictable rate movements, the Reserve Bank of India's (RBI) moves and mixed response from the lenders has put borrowers in some confusion. The inflation monster which had pushed prices to unimaginable highs has finally been tamed. From as high as 12.91 percent this year, the inflation rate has almost come down to half of that.

Does this mean borrowers can expect banks to reduce their home loan rates, if this trend persists? What is inflation?

Inflation is an increase in prices and/or decline in purchasing power. An increase in the amount of currency in circulation results in a relatively sharp and sudden fall in its value, and rise in prices. It can also be defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services. Inflation is caused more by global rather than by domestic factors today.

The year 2008 has seen extreme turbulence in all quarters. The stock markets tumbled down, wiping away tons of investor wealth. The inflation numbers touched new peaks and crude oil prices shot up. Prices of essential commodities and food rose sharply. And so did home loan rates, impacting borrowers adversely, especially those who did not see a proportionate increase in their pay purses.

High inflation rates are dealt with through a combination of market forces and government regulations. A host of RBI measures ensued. The RBI continuously monitors the monetary and liquidity conditions to maintain domestic macroeconomic and financial stability in the context of the global financial crisis. It hiked the repo rate and the cash reserve ratio (CRR), and then resorted to slashing them again.

The repo rate is the rate at which banks borrow money from the RBI. A reduction in the repo rate will help banks get money at a cheaper rate. When the repo rate is increased borrowing from the RBI becomes more expensive. The CRR is the proportion of reserves commercial banks must keep with the RBI. It has been slashed to 5.5 from nine percent. With the inflation rate declining, the RBI is expected to announce a further reduction in the repo and reverse repo rates.

Lending rates had gone up after the RBI took measures to tighten the money supply in a bid to bring down inflation. With inflation well under check, can borrowers expect a further fall in rates? Most public sector banks had lowered rates making it affordable. Some banks are yet to offer the reduced rates to their existing customers. In such a scenario, a floating rate loan would be an ideal choice. Since there is a possibility of reduction in rates, floating in these turbulent times is better than being locked at a high rate. Those who are unsure can wait for the turbulence in the markets to quell.

Real estate has been an ideal hedge against inflation over a long term. Limited land resources, a growing economy and increasing population make real estate an ideal investment avenue. When demand for housing goes up compared to supply, prices shoot upwards. With a fall in rates on the horizon and lucrative bargain deals offered by developers, it is time you seriously explored owing a house.

GAUTAM, a 32-year-old IT professional, ultimately decided to own a flat, which had been his and his wife’s dream from the day they got married. Very meticulously, he started exploring builder projects to locate a flat which fits his budget and meets his wife’s expectations. From the numerous projects visited, Gautam shortlisted two flats — one in Sparkling Heights and the other in City View. The flat in Sparkling Heights was ready to move in but the flat in City View was under construction and was available on construction-linked payment option.

Gautam was in a dilemma as to which option would be ideal for him. If he opted for the ready to move in flat, he would have had to start EMI (payment of interest and principal together) immediately, which he was not really financially prepared for. The advantage of buying a flat in City View was proximity to his office and kids’ school. He started showing interest in the under-construction project. This is where the concept of pre EMI (PEMI) came in for Gautam.

His friend Vikas, a senior credit manager with a housing finance company, clarified the PEMI concept in detail. In CLP, he would get the loan disbursement in tranches out of his sanctioned loan and the EMIs of the loan would not commence till the full disbursement of the loan happens. Gautam would have to keep paying the interest only for the intervening period for which the loan was partly disbursed.

Giving his expert comments on the payment schedule for flat in City View, he introduced Gautam to the pros and cons of paying PEMIs for the loan. The cost of a flat in City View was Rs 40 lakh and Vikash calculated that around Rs 34 lakh loan (85% of the property value) would be sanctioned by the housing finance company. Gautam would have to pay the balance amount of Rs 6 lakh from his savings.

If he availed the loan on CLP, he would have to make PEMI payments, which is only the interest on the amount disbursed. The disbursement is made by the financier according to the progress of the project. Gautam, clearly understood one major point — i.e. since the builder will be paid as per the work progress, there will be a constant pressure on the builder to deliver on time. He knew that as an individual he would have little control over his dream project.

ADVANTAGES OF Pre EMIS:

Gautam realised that PEMIs allows him the time to finance a property without losing out on dream flat he had selected for his family.

• Disbursement of sanctioned loan based over a period of time has an in-built advantage as payment is usually made based on progress of work. Gautam is not bound to pay unless the stage as per agreed terms is completed. In turn, the builder will try to give timely possession of the flat.

• Gautam also realised that he can at least see what kind of material is being used by the builder when he visits the project every fortnight

• Another advantage that Gautam discovered was that only interest was required to be paid, that too on the disbursed amount. And as per his calculation, by the time the whole EMI is payable he would get at least two increments (if not one promotion, which however he is not sure of at this time of financial meltdown) making his financial state a little comfortable.

DISADVANTAGES OF Pre EMIS:

Vikas also pointed out that PEMI option has following disadvantages which Gautam must be aware of:

• As per the calculation, Gautam would have to pay interest for 24 months and the total payment would be of around Rs 3.60 lakh, which would be additional interest payment (assuming rate of interest is 10% and quarterly disbursement of loan as per construction progress) since the EMIs will commence only when full disbursement takes place in two years.

• It also means that Gautam would have to pay interest along with his rent, which is currently Rs 15,000 pm and will increase at least 5% pa, in the two years. So his monthly outgo will increase during these two years

• Gautam knew the Income tax-implication as well — until he was given possession he couldn’t have claimed tax rebate under various section of I-T Act, 1961; neither against payment of interest nor against principal which he would only start paying once EMIs begin.

• The CLP-based payment plan monitors the progress of construction of project but the same is not true for the cases where the payment is time linked and not construction linked. In such cases, the builder raises the demand on the basis of due dates as specified in the payment plan, irrespective of stage of construction of the project. Vikas cautioned Gautam about such project for obvious reasons.

Unitech plans to invest Rs 2,500 crore to launch 10,000 residential units in the Rs 30-50 lakh category by the next fiscal. The company would launch affordable housing projects in Gurgaon, Noida, Greater Noida, Kolkata and Chennai, where it has land banks. “We have land at various places. We are in a position to launch a number of projects,” Unitech chairman Ramesh Chandra said. On how many housing units the company plans to launch, he said, “It could go up to 10,000 units by next fiscal. It will need an investment of Rs 2,500 crore on construction.” The housing units would be offered to customers in the range of Rs 30-50 lakh, Mr Chandra said, adding that the company would launch the housing projects taking into account the affordability of that particular city. Mr Chandra said affordable housing is determined by two things — market conditions and location.

It’s better to have a lower home loan exposure in times of falling real estate prices.

THE softening in real estate prices, which are now down in most places by as much as 25%, has not been the best piece of news for existing home loan borrowers. This is thanks to the “depreciation of security” clause that is mentioned in home loan agreements.

Simply stated, if the value of the property — which is mortgaged as security for a home loan — falls to below the outstanding loan amount, the borrower is required to pay the difference as a one-time margin amount to the bank. The other option is to provide additional collateral for the equivalent amount. If none of this happens, the bank reserves the right to seize the flat and a borrower, in turn, becomes an unenviable defaulter irrespective of his repayment record.

Let us take the example of a person who has bought a house for Rs 50 lakh. In line with the stipulated loan-to-value ratio, the bank cannot lend more than Rs 42.5 lakh. In today’s market, the value of that property drops by, let’s say, a quarter. The value of that house consequently is now Rs 37.5 lakh. Suddenly, the borrowed amount is less than the collateral, which leaves the bank with a situation where it can ask for additional collateral. This may be in the form of gold, property or any other asset. If none of that materialises, the borrower makes the margin money payment out of his/her pocket.

The way out for the borrower, according to experts, is to have higher home equity. The clause becomes vital only if the bank has a higher equity component than the borrower.

If the borrower holds substantial home equity component through his personal funding and pays EMIs regularly, then he will not be in a tricky situation.

From the bank’s viewpoint, a borrower, who has demonstrated the ability to repay on time, is often the preferred one. Usually they make some leeway for a borrower with a good payment track record. A disciplined borrower can negotiate with the bank for more time to pay the collateral/margin money.
The collateral issue has changed substantially over the past few years. Banks typically are mandated to lend up to 85% of the property’s value to the borrower. But that has often has been breached with past instances suggesting that the number could be as high as 95%. The borrowers did not have to bring in very much and, as a result, could easily stretch their finances.

Banks undertake valuation exercises for property that is under construction. According to an official at a private sector bank, If the value (of the property) falls by 25%-30%, we revalue it, especially if we have lent up to 85% of the value. The idea is to ensure that the outstanding loan amount is lower than the property value.

Interestingly, if a borrower approaches a bank today, he will get a lower loan amount, as the bank discounts the property value. If a borrower approaches with a property value of Rs 1 crore, we evaluate it at Rs 80 lakh. This is not just in our interest but also augurs well for the borrower.

The crucial part is to ensure that the borrower does not go overboard. A borrower should not increase his or her loan exposure even if it’s a home loan. A buffer should be created by borrowing only 50%-60% of the house value.

The markets follow a cyclic pattern. Around eight months ago, it was a seller's market. Real estate prices had pinnacled and were unaffordable to many. Today, it is a buyer's market. Developers are wooing customers with bargain deals and innovative offers. Is it time to clinch a great deal and own that dream house?

Investors dread the inflation monster that erodes hard-earned money. Buying a property is a wise decision for those who are prepared to stay invested for a long term. Real estate has yielded a compounded return of over 20 percent per annum over a long term. In cases even more. Perhaps that's the reason why it is considered an effective tool to beat inflation.

People paying a huge rent month after month must contemplate buying their own home. By paying EMIs to the lender instead of rent, you can own the house in the next 20 years. Interest rates are sliding to single digits making borrowing a less painful experience.

Investment in property calls for tremendous caution. The property's title needs thorough investigation. Location of the property is another vital issue. You can buy a larger house for the same money on the outskirts of the city, than in the heart of the city. However, a location far away from city may lack in the amenities you need. A property located in a prime residential area appreciates faster and has greater resale value. Factor in condition of the building, parking, neighborhood, safety and water quality.

Bargain deals from developers are the best bait that prospective home buyers must consider. Unheard of deals and offers are on the platter.

pulled up the cost of construction. Interest rates on home loans had crossed double digits and land prices had sky rocketed. The mood in the realty sector is upbeat. People who had procrastinated on their decision to invest in property are reconsidering their decision. With ever-increasing population and ever mounting demand for housing and office space, property values are set to appreciate.

Bear in mind a long term investment perspective. Add realty to your portfolio and beat the inflation monster.

This explains what goodwill is and how it is applicable to property

Goodwill is an intangible asset. It cannot be seen or felt physically. However, it is not a fictitious asset. It has value, and can be sold and transferred. Sometimes, goodwill is more valuable than the tangible asset itself. A person making a sacrifice must be compensated for the loss through goodwill.

While purchasing property, especially commercial property, you have to invariably pay for the goodwill. Goodwill is easy to think of but very difficult to define. It is something which will bring to the purchaser profits in future almost without his own efforts. The efforts have already been made in the past. Goodwill is the ability to earn profits higher than others. It enables earning of excess profits over and above what generally firms earn. It arises only if the firm can earn super profits.

Goodwill is the probability that customers will patronise the old place or supplier. It enhances the capacity of the business to earn profits in the future. It is the benefit and advantage of the good name, reputation and connection of a business. It is something that distinguishes an old established business from a new business. It is the value of the reputation of a firm in respect of profits in future over and above the normal expected profits.

When a person pays for the goodwill, he pays for something which places him in the position of being able to earn more than he could have by his own unaided efforts.

The value of goodwill depends on the mutual agreement between the purchaser and the seller. There are a few accounting methods available to determine the quantum of goodwill. One of the methods is called the 'number of years' purchase of average profits'. Under this method, the past profits of a number of years are totalled up and average found out. The average profits are then multiplied by a certain number of years to arrive at the goodwill. The number of years is with reference to the future expected number of years for which the excess profits will continue.

Another method is the capitalisation method where the value of the business is ascertained on the basis of actual profits, which is capitalised at a predetermined rate. Builders charge goodwill for shops in the vicinity of residential societies as the purchaser gets access to a large consumer group. Similarly, cinema halls charge goodwill for opening eating places within the premises. Same is the case of hospitals charging goodwill for opening of chemist shops within the hospital premises.

The logic is simple. By virtue of having a chemist shop within the hospital premise, the chemist gets an assured supply of customers. The hospital needs to be compensated for the benefit being availed of the chemist by virtue of the location in the hospital premises.

Being an intangible asset, the rules of valuation differ from business to business and place to place.

Some factors that influence determination of goodwill:

• Location

If the business is located at a potential place, resulting in good sales or economies, the value of goodwill will be correspondingly higher. For example, a property in the central business district will command a higher goodwill than one in the outskirts.

• Significant factors

In some cases, if a place has historic significance, its goodwill will also be correspondingly higher. The people who live in the surrounding areas can increase the goodwill. Presence of large companies in the vicinity enhances the value of the property.

• Conveniences

Factors such as access to supplies make a difference. Also, if a firm enjoys a good reputation for the quality of its products, the value of its goodwill will be high.

Some conditions usually applicable to avail a loan to buy a plot of land

A loan to buy a site is available if you want to purchase a plot of land and construct a house on it later. Usually, the bank insists that the site be purchased from a recognised authority like a development authority such as the Bangalore Development Authority, from a society or from a recognised developer.

In addition to the normal documentation, some additional documents are required to avail a land loan. These include:

• Original documents of ownership of land
• No encumbrance certificate from the registrar's office certifying that the land is not already mortgaged
• Layout drawing (approved by the city development authority) of the location where the land is, giving details of the precise location of the site and its surrounding areas
• NOC from the society for sale and transfer of land Latest revenue receipt confirming payment of land dues to the government and tax receipt for tax paid by the owner of the land

Also, most banks finance the purchase of a site only if it is in a location within the limits of the municipal corporation.

Most banks have a minimum and maximum loan amount that they lend for the purchase of a site. This differs from one bank to another. Most banks specify a limit on the loan-to-value ratio that they maintain. It could vary from 60 to 70 percent of the registered value.

The loan amount offered has no relation to the market value of the property. Any premium paid by the purchaser has to be out of your own resources. Some banks charge a higher rate of interest on loans for purchase of a site. The rate of interest on these loans may be higher by about 25-50 basis points.

The disbursement of the loan amount is always in favour of the seller of the site unless the purchaser has already paid the amount to purchase the land. Typically, the charges applicable to normal housing loans are applicable to land loans as well. Further, the age norms for a customer to be eligible for a land loan and the eligibility calculations for computing loan amount are the same as that of a regular home loan. Most banks also have a minimum income criterion. The repayment for the loan is through equated monthly instalments (EMIs) just like other home loans .However, the tenure of these loans is usually lower – up to 10 years.

The interest paid on the money borrowed for the purchase of land is not eligible for income tax deductions. However, once the borrower converts the land loan into a housing loan to finance the construction of the house, he can avail the tax benefits available under the Income Tax Act.

The security of the loan is an equitable mortgage of the site. It is done by depositing the original title deeds of the site with the lender. The lender may also insist on additional collateral security depending on the type of land.

Financing purchase of sites is a bit risky because of difficulty in documentation. Further, there is risk of security of the property. This is compounded by the fact that there may be delay in commencement of construction. One necessary requirement is that the land should be developed and clearly demarcated, and should have been approved for residential buildings