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.