A joint loan while buying is
beneficial; make full use of deductions available while selling.
Irrespective of class or income, Indians are fond of buying gold
and real estate. Purchasing and selling the metal is a straightforward game but
a property, through its lifecycle (buying, owning and selling), can be taxing. If played right, you can
reduce the tax outgo.
While buying
A house is the biggest purchase most people make in their lifetime
and the government realises this. To give buyers relief, the government has
allowed income tax (I-T) deductions if the property is bought on a loan. Under
Section 80C, the borrower can claim deduction of up to Rs 1.5 lakh. For a
self-occupied property, a Rs 2 lakh benefit is available under Section 24 (b)
of the Income Tax Act for interest on the home loan. If the property is not
self-occupied, the entire interest paid to the lender can be deducted from
income. "This applies even if a person borrows money from a friend, his
family or a private lender provided appropriate loan document between the
borrower and private lender is done and there is either a letter or a
confirmation of interest charged by lender," said Hemal Mehta, senior
director, Deloitte in India.
Problem area: Under the current market conditions, project delays
are a common thing. This can cause financial trouble to the borrower. A person
can't claim deduction for the interest if his or her house is still under
construction. A buyer can, however, get benefit for the principal amount. On
possession, the borrower can claim deduction for the interest paid during the
pre-construction period. This needs to be done in five equal instalments,
starting the financial year you are handed the property.
Tip: To take advantage of current laws, a couple should take a
joint loan in equal proportion. This will allow each to claim full tax
deductions available for the principal and interest. This also applies to a
child and a parent.
While you own it
If it's the borrower's only house and self-occupied, there's no
taxation. For those who have two or more houses and these are neither let out
nor occupied, the taxation can get tricky.
According to I-T laws, in such cases the owner should take a
notional rent value and pay tax on it. There's a prescribed method to calculate
the notional value, which takes into consideration the municipal value of the
property and the rent control legislation (either of the two) or the prevailing
rent in the area for a similar house. "In a case of a notional rent, there
is no rule to submit a certificate from a third party. However, it's better
that a person submits a letter from a broker stating the prevalent rent in the
area," said Mayur Shah, executive director - tax & regulatory
services, EY India.
Problem area: If you are claiming housing loan deductions and
housing rent allowance (HRA) at the same time, it can cause trouble. Many
people claim HRA by showing rent paid to parents or wife (if there's a house in
their names). A taxpayer is allowed HRA and loan deductions both under certain
conditions. For example if your house is in a different city than that of
residence. The department also allows you to claim HRA if you have a house in
the same city as your residence, but you need to have a genuine reason. For
example, many people in metros such as Delhi and Mumbai own house in far-off
suburbs and can find it difficult to commute, owing to the distance. In such
case, the person can claim both.
Tip: While calculating the notional value of a second home, you
are allowed to claim few deductions such as municipal taxes. Also, an owner can
claim deduction of a sum equal to 30 per cent of the value of the house
property towards repair and maintenance charges.
While selling
When a person sells a property, he or she needs to pay tax on the
profits made. If sold within three years of acquisition, the seller needs to
pay short-term capital gains tax (STCG). In this case, the profits are combined
with the income and taxed on the I-T slab rate.
If the property is held for more than three years, it attracts
long-term capital gains tax (LTCG). The tax is levied at 20 per cent (plus
surcharge and cess) after adjusting the gains for inflation using the cost
inflation index the government issues.
A seller can save entire tax outgo if he or she uses proceeds
equivalent to long-term capital gains for buying a new house located within
India within one year prior to the sale date or two years from the sale date.
If the property is under construction the time period permitted is three years.
The amount used for buying a new property is exempted from tax and
if there's any balance, it will be taxed at a flat 20 per cent (plus cess and
surcharge). If you are not immediately buying a house, this money needs to be
kept in the Capital Gains Account Scheme (CGAS), and withdrawn within the
stipulated timeframe.
If you don't want to go for a residential property, you can still
save LTCG tax by investing in specified bonds issued by the National Highways
Authority of India or Rural Electrification Corp (under section 54/54EC) within
six months from the date of sale. These bonds have a lock-in period of three
years. Also, the seller can only invest a maximum of Rs 50 lakh in these bonds,
while you have to pay tax on the remaining amount.
Problem area: If the seller had inherited the property or it was
gifted to him, the capital gain will be computed on the basis of the cost to
the previous owner. If the house was purchased before April 1, 1981, the I-T
department will consider the acquisition cost by the original owner or the fair
market value of the property as on April 1, 1981, whichever is higher.
If a person sells an under-construction property after holding it
for over three years, the taxation rules completely change. This is because the
I-T department considers the person as a property owner only when he or she has
received possession.
Tip: While calculating STCG and LTCG tax on sale of property, one
can deduct the money spent on improvement and also cost for acquiring the asset
such as stamp duty, legal fees, and payment of brokerage.
For more tips, just go to Westhill Consulting British Colombia
website. Westhills offers a wide variety of innovative housing styles and
options. You can also visit our Linkedin group and
read some discussion for more info.
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