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.

Investing in a house is the best way to save tax. Tax experts say buying a second house as an investment will save even more tax for you than the first house you bought for your own use. When you buy a house for your personal use, you can avail a deduction from your taxable income against the interest payments of up to Rs 1.5 lakhs only on the loan taken to buy the house. Besides this, you can also avail the benefit of deduction against the repayment of principal amount under Section 80C. However, under Section 80C, you can avail a deduction up to Rs 1 lakh, but this is inclusive of all investments like your contribution to EPF, PPF, tax savings mutual funds and school fees of your children, among other things.

Therefore, normally, if your taxable income is more than Rs 5 lakhs, most of the limit provided under Section 80C is exhausted because of the compulsory savings schemes. Still, if you take repayment up to Rs 20,000 against the principal under Section 80C, your net tax savings every year will be Rs 52,350.

This is mainly because the benefit against interest payment is capped at Rs 1.5 lakhs even if you have taken a loan of Rs 50 lakhs to buy a house at eight percent, and your interest outgo in the first year will be Rs 3,96,181. The monthly installment on the Rs 50 lakhs loan at eight percent for 20 years will be Rs 41,822. This works out to an annual payment of Rs 5,01,864. Out of this, Rs 3,96,181 will go against the interest payment in the first year and the rest Rs 1,05,683 will go against the principal repayment.

Despite, the interest payment of Rs 3,96,181 you will get a deduction benefit of Rs 1.5 lakhs only. So, the tax benefit under this will be Rs 46,350 - including the education cess - at the rate of 30.9 percent. Besides this, though you have repaid Rs 1,05,683 from the principal, you will get a deduction of Rs 20,000 as most of the quota of Rs 1,00,000 is used up by the investments in other instruments. So, the tax benefit against the principal repayment will be Rs 6,180, making your total benefit Rs 52,350.

But, if you have invested the same amount to buy a house as an investment instrument, you can take the benefit against the interest payment for the entire amount. In this case, the benefit against the interest payment is not capped. But, there is a catch. The rental income of the house will be included in your income.

But, in India, annual rental income, most of the time, is in the range of 2-3 percent of the capital value. Even today, an apartment of Rs 50 lakhs is easily available on rent for Rs 10,000 a month. At the same time, the repayment of principal amount will not be allowed for deduction from your taxable income under Section 80C. But still, as the interest payment on the loan is huge, the rental income does not offset a substantial benefit.

Take for example a loan of Rs 50 lakhs. In this case, the interest payment in the first year is Rs 3,96,181 and the rental income is Rs 1,20,000. But, only 70 percent of the rental income gets added to your income. You get a rebate of 30 percent on rental income against the maintenance of the house. So, in the first year, only Rs 84,000 will be included in your income as the house income. Now, as you spend Rs 3,96,181 as interest payment and Rs 84,000 you earned as house income, you will get a net deduction of Rs 3,12,181 because of your investment in the house. At the rate of 30.09 percent, you will save a tax of Rs 96,464.

Similarly, in the second year, the interest element in your EMI will come down to Rs 3,87,409 while your tax benefit will be Rs 92,456. In the calculation for the second year, the rental income was taken at Rs 10,500 - five percent more than that in the first year. Similarly, for the third, fourth and fifth year, as shown in the chart, the tax benefit remains substantially more than when the property is bought for personal use.

Because of the tax benefit, the effective interest rate on your loan will work out to be six percent, instead of eight percent - the rate at which you have contracted the loan. This benefit will become even bigger, if you are buying a house of larger amount. While the loan amount becomes bigger, the interest amount will become larger. In the case of buying the house as an investment, you can avail the benefit of deduction against the interest payment. But, in the case of personal use, it is capped at Rs 1,50,000.

However, the rental income may pose a problem in the 10th year onwards. Around the 10th year, the tax benefit in case of buying as an investment will be lower than in case of buying for personal use. But, at the same time, after 10 years, the value of money will go down substantially and so the payment of a higher tax will not hurt you as much as it does today.

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.

Here we compares a short and long tenure loan to analyse the impact of tax benefits

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.