The current market conditions are good for those looking at investing in a residential property. Many good deals are available in the market. Many new housing projects are being launched by developers with attractive and affordable prices. Also, the housing loan interest rates are low. Attractive property rates together with low interest rates on housing loans and tax benefits make property investment a good value proposition for property buyers.
A home loan attracts a significant amount of saving from income tax. Home loan borrowers can claim a deduction of up to Rs 1.5 lakhs from their taxable income against the interest paid on a housing loan. The repayment of the principal amount of a home loan is eligible for an income tax rebate up to Rs 1 lakh under Section 80C. Therefore, a home loan brings a significant tax incentive for the borrowers, especially for those in the high taxable bracket.

Claiming IT rebate

According to the Income Tax Act, only those who have taken a housing loan from a recognised financial institution and solely or co-own the property can claim rebates from IT.

Tax deductions can be claimed upto a maximum of Rs 1.5 lakhs under Section 24 for the interest payments on housing loans. The interest on home loans taken for repairs, extension or reconstruction of an existing property also qualifies for the deduction of Rs 1.5 lakhs. One can also claim rebate under Section 80C for the principal amount payments made against a housing loan. It should be noted that the upper limit of Section 80C is Rs 1 lakh and it includes all tax saving instruments, for example, provident fund, life insurance policies, tax saving bonds etc.

Income tax and HRA

Many people have this question - is it possible to claim HRA benefits as well as home loan rebate/deductions under the income tax. The answer to this question depends on the situation and should be decided on a case to case basis with your employer or income tax advisor.

These are some typical situations:

Living in own house

If you are living in the house which you have bought with a loan, you will be eligible for tax rebate under Section 24 and Section 80C only. You will not be eligible for any tax rebate under the HRA clause.

Own home under construction

If you have taken a loan to buy a home but the home is under construction and hence you are forced to live in a rented place, you cannot claim income tax benefits on the housing loan. You can claim only HRA benefits till the date you get possession of your house. After that date you can claim the housing loan benefits and HRA benefits will stop. However, you can adjust the interest paid during construction period in subsequent years subject to your total limit of Rs 1.5 lakhs under Section 24.

Feasibility to occupy own house

Suppose your own home is in a different city than your work location or the home is in the same city but at a considerable distance from your workplace, you can claim the benefits of income tax rebate and HRA simultaneously.

Own house let-out

If you rent out your own house and live in a different rented place, you can claim the benefits of income tax rebate as well as HRA. However, the rent you receive would be added to your taxable income. Also, in case of rented property you can claim a flat deduction on account of repairs and maintenance at 30 percent of rent received minus property tax. The upper limit of Rs 1.5 lakhs on interest deduction is not applicable in this case.

One of the most attractive features of a housing loan is that it helps in reducing your income tax liability, and thus makes it easier and cheaper to build a fixed asset. A housing loan makes you eligible for tax rebates under Section 80C and Section 24 of the income tax regulations.

A joint housing loan comes with the twin benefit of increasing the overall loan eligibility and the income tax rebate that can be claimed by both co-applicants individually under Section 80C and Section 24. The mandate in claiming the income tax rebate is that the co-applicants of the housing loan should also co-own the underlying residential property.

Who are eligible?
A joint home loan can only be availed by a minimum of two and maximum of six applicants. A borrower cannot take a joint home loan with just any person. In general, the lender defines the relationship between co-borrowers eligible to take such a loan. A joint housing loan is given to married couples or close blood relatives like parent and child.

Some banks allow brothers to take a joint home loan provided they will both be coowners of the property. Usually, banks insist that all coowners of the home must be co-borrowers in a joint home loan. Generally, friends or unmarried couples living together are not allowed to take joint housing loans.

Ownership structure

The ownership structure of the property is a very important factor in case of a joint loan. Ownership of the house makes one eligible for the tax benefits. The tax benefits are applicable in ratio of ownership in the property and therefore the ownership of property should be carefully decided keeping in mind the re-payment capacity of both the borrowers.

In case a person is just a coborrower of a loan and not a co-owner in the property, he cannot claim the tax rebates. On the other hand, if the coowners are equal owners of a property but if the share of the loan is 2:1, the tax benefits can also be availed in the same ratio. Usually, banks do not accept split EMI payments (two or more cheques for the same EMI). The EMI in joint accounts can be made through a joint account owned by coborrowers or by splitting EMIs in a financial year in the proportion of loan share.

Income tax benefits

The income tax benefits are applicable in proportion to the ownership structure. For example, if the ownership in a property is 60:40, a loan of say Rs 50 lakhs will be split as Rs 30 lakhs and Rs 20 lakhs respectively and this ratio will be applicable while calculating tax benefits on interest/principal repaid on this loan. Therefore, it is advisable for joint owners to procure an ownership sharing agreement stating the ownership proportion on a stamp paper as legal proof of the ownership.

The case for the housing loan gets stronger in case of joint applicants. Banks consider the earning potential of co-borrowers and decide on the eligibility of the loan. Therefore, the loan eligibility increases in case of joint loan account.

The joint account holders (owners of the property) can claim income tax benefits individually. The housing loan benefits that fall under Section 80C and Section 24 of Income Tax Act make each borrower eligible for a maximum deduction of Rs 1 lakh and Rs 1.5 lakhs associated to principal repayment and interest payable on the home loan respectively. For example, a husband and wife, both of whom are tax payers with independent income sources, get tax deduction benefits, with respect to the same housing loan to the extent of the amount of loan taken in their respective names. The maximum deduction in such a case would Rs 2 lakhs on the principal repayment and Rs 3 lakhs on interest payment.

How a home loan’s tenure, interest amount and EMI are linked? Here is how....
The repayment of a loan taken to buy a house is made through EMIs (equated monthly instalments). EMIs are the fixed instalments which a borrower needs to pay over the tenure of the loan to repay the debt as well the related interest for the period to the bank.

Usually, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure, divided by the tenure of the loan (in months) gives you the EMI. The amount of EMI to be paid depends on and varies with the amount of loan, tenure of loan, and rate of interest. One of the important parameters governing the EMI is the tenure of the loan. Nowadays, you can avail loans for various tenures - between five and 20 years, and in a few cases upto 25 years as well.

Arriving at tenure

Here are two most significant factors that determine tenure:

1) Age: If you decide to borrow early, you can opt for a longer tenure loan - 15 to 25 years. This way, your monthly EMI payment would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing towards the end of your career, you may have to opt for a shorter tenure.

2) Income: This means both the present as well as the future income. You should be able to repay his EMIs without compromising drastically on your quality of living. The cash flows available after payment of EMIs should not entail a dent in the living standards. As such, a judicious planning of cash flows is required.

Tenure and interest

The longer the tenure, higher will be the interest rate. This is because of the increased risk the bank has to take. Also, the interest amount in absolute terms is higher, because of the longer tenure. However, the EMI is lower because the loan and interest are spread over a longer span of time.

The shorter the tenure, lower will be the interest rate. This is because of the relatively lower level of risk the bank takes. Also, the interest amount in absolute terms is lesser, because of the shorter tenure. However, the EMI is higher because the loan and interest are to be repaid over a shorter span of time.

Tax benefits

You should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest upto Rs 1.5 lakhs per annum paid on housing loans is deductible from the taxable income of a borrower. You should structure the housing loan amount and tenure so that your annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course, this would be contingent on other factors as well, like your annual income and savings potential.

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.

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

If you apply for a loan jointly with your spouse, you can get a higher amount and maximum tax benefits

A joint loan is often considered a tool to enhance loan eligibility. When a borrower's income is clubbed with that of his spouse or parents, their combined income is taken into consideration by the lender. Thus, they are entitled to a larger loan and can afford a bigger house.

Banks insist that all co-owners be co-applicants. But the reverse is not necessarily true. All co-applicants need not necessarily be coowners. Some banks may have hesitations to allow brothers or sisters to apply jointly. The lender may be unwilling to take the risk of a family dispute in future that could impact the repayments due to him. That's the same reason why banks do not allow friends or distant relatives to apply jointly for a loan.

Only owners and co-owners are eligible for tax benefits in respect of home loan repayments. If you are neither the owner nor the coowner of the apartment, you will not be eligible for any tax benefits on the loan repayments.

Home loan borrowers can claim tax deduction benefits on the interest portion of the loan under Section 24(b) of the Income Tax Act. In case of a self-occupied property, the deduction on interest payable is limited to Rs 1.5 lakhs. The principal portion of the loan paid is eligible for deduction under Section 80C. Tax deduction benefits on the principal component under Section 80C is up to a limit of Rs 1 lakh.

Consider the scenario, where both husband and wife contribute towards EMI repayments. How are they eligible for tax benefits on their repayments? You will get tax benefits in the proportion to your share in the loan. Since a home loan is huge amount, the interest and principal repayment components tend to exceed the deduction limit. By applying jointly for a home loan, the co-owners can claim tax deductions in the proportion of their holding in the loan and avail maximum tax benefit.

If you apply jointly, you can increase your loan eligibility and get maximum tax benefits.

How you can avoid paying capital gains tax
There are some provisions in the Income Tax Act that make it possible for you to reduce your capital gains tax liability. The Act contains provisions regarding tax of capital gains arising out of transfer of a residential property. Capital gains tax is leviable on sale or transfer of a house. What constitutes a sale and transfer has been specified under the Income Tax Act.

Capital gains tax is computed on the indexed cost of the asset purchased, which is deducted from the sale amount received by the assessee. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year.

The income from the house should be chargeable to tax under the head 'Income from House Property'. Other immovable properties, although owned by an individual, are not eligible for this exemption. The capital gains should arise from the transfer of a long-term capital asset. The house must be held for a period of more than 36 months before the date of sale or transfer. The house may be self-occupied or rented out.

In order to avoid the capital gains tax, an assessee can either purchase a house within a period of two years after the date on which the transfer took place, construct a house within a period of three years after the date of transfer, or should have purchased a house one year before date of transfer. In these cases, instead of the capital gains being charged to income tax as income of the previous year in which the transfer took place, will be dealt with in accordance with two provisions.

One, in case the capital gains is more than the cost of the house purchased or constructed, the difference will be charged as income of the previous year. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new asset, the cost will be zero.

Two, in case the capital gains is equal to or less than the cost of the new asset, it is not charged to tax at all. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new asset, the cost will be reduced by the amount of the capital gains.

The part of capital gains not appropriated by the assessee towards the purchase of a new house made within one year before the date of transfer of the original asset, or which is not used by him for purchase or construction of a new house before the date of furnishing the returns of income, should be deposited by him in specified bank. The amount should be deposited before the due date for filing income tax returns.

The proof of this deposit should be attached with the income tax return. The amount used by the assessee to purchase or construct a new house together with the amount deposited will be deemed to be the cost of the new house. In case the amount deposited is not used in full for the purchase or construction of the new house within the period specified, the unused amount is charged as income of the previous year in which the period of three years from the date of the transfer of the original house expires. The assessee will be entitled to withdraw the amount in accordance with the provisions of the scheme.

This benefit is available only for individuals and Hindu Undivided Families (HUF).

Investment begins at home. Though the real estate sector has seen a deep correction, a house is probably one of the best investment avenues one can seek today. Despite the global economic slump, which has hit the property prices too, real estate still remains a prized possession.

If falling interest rates and cooling off property prices are prompting some to take a leap and grab their dream houses, there is also no dearth of those who want to sell their house to overcome the recession blues. And, given the importance attached to this most prized asset class, taxman has provided tax incentives for both the buyer as well as the seller of the house.

Buying A House
If your dream house has now come within your reach, check out the following before taking the plunge.

(a) It is always advisable to go in for a home loan. Interest paid on home loans can be deducted from your taxable income up to a maximum of Rs 1.5 lakh.

As this deduction is applicable to each individual owner of the house, this can be a double bonanza in the case of joint ownership. Thus, if the joint owners equally bear the interest burden, then each owner shall be eligible for a deduction up to Rs 1.5 lakh
However, it is important to note here that where more than one owner claims deduction, the total deduction cannot exceed the actual interest paid by the joint owners.

For example, if the annual interest liability on the house property is Rs 2 lakh and the property is jointly owned by husband and wife, then each gets a deduction of Rs 1 lakh only.
Similarly, where the annual interest liability is Rs 4 lakh, then each owner gets a deduction of Rs 1.5 lakh only, taking the total deduction to Rs 3 lakh

(b) It is not only the interest repayment but even the principal re-paid can be claimed as a deduction under section 80C. The limit here is restricted to Rs 1 lakh provided the loan is borrowed from a recognised financial institution

Owning More Than One House

It is not unusual to see people own more than one house these days, especially by those who like to invest in real estate. It has in fact become a common practice to buy and let out houses, which also adds substantially to one’s income, given a high demand for rental premises.

If the subsequent houses are also purchased through borrowed finance, the entire amount paid as interest can be claimed as deduction from taxable income. Ceiling limit of Rs 1.5 lakh is not applicable in case of subsequent properties as these are deemed to be let out.

Thus even if the same are vacant, the owner shall be required to disclose a notional rental income that the property would have derived had it been actually let out.

Selling A House

Selling a house is rewarding - from tax perspective - provided the same is held for at least for three years before transferring the title. Holding a property for three years and more makes it a long-term capital asset and eligible for various tax incentives under the Income Tax Act.

Gains arising from the sale of a house are treated as income and are thus taxable in the hands of the seller of the property. However, if the sale proceeds are utilised for either buying or constructing another property, the same shall be exempt from taxes.

However, one needs to keep in mind the following to avail of these tax incentives.

(a) If the new house is intended to be bought, the same should be purchased one year before or within two years of selling the existing property

(b) However, if the new house is to be constructed, ensure that it is done within three years of sale of the earlier property. It is not necessary to begun construction only after selling the earlier property. However, the construction must be complete within three years of sale

(c) For the interval between the sale of the existing property and buying or constructing another property, the sale proceeds need to be deposited in the ‘capital gains deposit account scheme’ with any nationalised bank. The proof of this deposit should be submitted along with the return of income to claim an exemption from capital gains tax

For those who do not wish to acquire another house from the sale proceeds of the existing property, capital gains tax can be avoided by investing the sale proceeds in the capital gains bonds issued by NHAI or REC within six months of sale of the property. The maximum investment permitted in such bonds is Rs 50 lakh, and these bonds can be redeemed only after three years from the date of investment.

Rental Accomodation

Tax incentives are available not only for the owners but also for those who have rented accommodations. In case of salaried employees who receive a house rent allowance (HRA) from their employers, the least of the following three options can be claimed as an exemption under section 10(13A):
(a) HRA actually received from the employer
(b) Rent paid in excess of 10% of the salary
(c) 50% of the salary (metros) or 40% of the salary (non-metros).

In case of self employed individuals or those employees who do not receive an HRA, the least of the following three options can be claimed as an exemption under section 80GG:
(a) Rs 2000/- per month
(b) 25% of the total income
(c) Rent paid in excess of 10% of total income.

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