From ET Realty
Buying a new house: If you have several years of employment ahead of you, home loan is an ideal option. In fact, it works better than dipping into your savings, as the tax law provides for benefits both for the payment of interest and repayment of the principal amount. Typically, the longer the loan tenure, the lower is the monthly EMI but higher is the interest outgo. For instance, one bank charges an EMI of Rs 42,889 for a loan amount of Rs 20 lakh for a duration of 5 years. For a loan tenure of 10 years, the EMI charged is Rs 26,875. But shop around for a home loan since banks offer different rates and terms.
Interest payable on home loans and the tax benefit: Irrespective of whether you are paying interest to a bank or to your employer or friend, interest payable on home loans for ‘self-occupied’ property is subject to a maximum deduction of Rs 2 lakh under the head ‘Income from house property‘.
For first-time home buyers, with effect from April 1, 2016, an additional deduction of Rs 50,000 per annum on account of interest paid on housing loan is available under Section 80EE. The deduction would be available if loan is sanctioned by a bank during April 1, 2016-31 March, 2017, the value of loan sanctioned is up to Rs 35 lakh and the value of this house does not exceed Rs 50 lakh.
It may be cheaper to book an apartment under construction. In this case, you can claim the total interest paid during the pre-delivery period as a deduction in five equal instalments starting from the financial year in which the construction was completed or you acquired your apartment (generally this denotes the date of possession). Of course, the maximum you can claim as deduction per year continues to be Rs 2 lakh if the loan is taken before April 1, 2016 or Rs 2.5 lakh if the loan is taken on or after April 1, 2016 by a first-time home buyer.
What is ‘self-occupied’ property: It’s best to be clear on what constitutes ‘self-occupied’ property. Here is some guidance: If you are suddenly transferred to another city (where you live in a rented apartment), your own property will be considered as ‘self-occupied’. Also, if you have opted to purchase a new apartment in a tier 2 town where property is cheaper, and continue to stay in a rented premise, this new apartment will be regarded as ‘self-occupied’ entitling you to deduction of housing loan interest.
CAUTION POINT: A certificate from the lender is required to claim deduction for interest even if the lender is an employer or a friend. To claim deduction, it is essential that the acquisition or construction is completed within 5 years from the end of the financial year in which the loan was taken; else the deduction allowed will be limited to Rs 30,000.
Set-off your interest payment: As income from a ‘self-occupied property‘ is nil, deduction of interest, in technical parlance, will mean a loss under the head ‘Income from house property‘. This “loss” can be set off, in the same year, against your income under other heads (including salary income). Such set-off will reduce your total tax liability. Any loss not set-off within the same year can be carried forward and setoff in the next 8 years. However, in the subsequent years, such set-off is possible only against ‘Income from House Property’. So even if you let out your property next year, this carry forward of loss can bring a marginal dip to your tax liability.
HOT TIP: If you have purchased a new apartment jointly – say, with your spouse and are also paying the home loan jointly, then each of you is entitled to deduction up to Rs 2 lakh-2.5 lakh. In case you have a working son/daughter and the bank is willing to split the loan three ways, all three can avail deduction, subject to given conditions.
Repayment of housing loan: The principal repayment of the housing loan is allowed as a deduction from your gross total income, subject to an overall cap with other eligible investments of Rs 1.5 lakh.
CAUTION POINT: Unlike deduction of interest, deduction of principal repayment will be allowed only if the loan is taken from specified institutions – like banks or LIC.
Your TDS obligations: If the value of your proposed flat is more than Rs 50 lakh, you are required to deduct withholding tax at the rate of 1% from the payment made. In case you are paying the builder in instalments, as the property is still under construction, but the total value of the property exceeds Rs 50 lakh, the same rules for withholding tax apply. Tax has to be deducted against each instalment paid by you. Tax withheld has to be deposited by the 7th of each subsequent month (except March where due date is April 30).
In addition, you will be required to furnish information about the tax deducted and deposited online on the Tax Information Network (TIN) website in Form 26QB (URL is https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp). Further, you will also have to download Form 16B, which is the TDS certificate from the website (URL is https://www.tdscpc.gov.in/app/login.xhtml) and issue it to the seller. In case of failure to comply, you will have to pay interest and penalties.
Best to let out your 2nd house: Make sure not to keep your second house (which is not a self-occupied property) unoccupied. Your second house if locked and empty will still attract tax on its ‘deemed rental value’. In other words, tax is calculated at expected market rent.
For example: If your interest outgo is Rs 15 lakh and the rent is Rs 10 lakh, you can get a tax benefit on Rs 8 lakh (Rent Rs 10 lakh less: (a) Standard deduction of 30% of rent which is Rs 3 lakh and (b) Interest Rs 15 lakh). This is applicable for any number of houses and there is no cap on the amount of deduction you can claim.
Selling your apartment: If you sell your house, whether it is self-occupied or your second apartment, you will incur capital gains (given that there has been appreciation in property prices, it is unlikely that you will be making a loss). Capital gains is the difference between the sale proceeds and the cost of acquisition of the apartment you are selling. If the house is held for not more than 36 months, you will incur a short-term capital gain, which is subject to tax based on your applicable slab rate. If you fall in the lower tax bracket with a tax rate of 10.3%, short-term capital gains will not pinch you. Else you could end up with a tax rate of nearly 35%.
If the property is held for more than 36 months, LTCG arise. The cost of acquisition used for computing LTCG is the indexed cost of acquisition (in other words, an adjustment is made for inflation). Tax is levied on LTCGs at 20% (plus surcharge and cess as applicable). Save on LTCGs: Reinvestment of capital gains could get you tax breaks.
Reinvesting in residential property or securities: To be able to save tax on capital gains, you must invest the entire LTCG from the sale of residential property in another (i.e. only one) residential property in India (one year before or two years after the date of sale). You could also construct another residential house property in India within three years of sale. Also, you may put the amount of capital gains in capital gains account scheme with a bank where investment in new property is not made before filing of tax return. If the entire amount is not reinvested or not deposited in capital gains account scheme, the remaining portion of the gain will be taxable.
CAUTION POINT: Exemption from LTCG will not be available in case the reinvestment is made in more than one flat (even if the same are adjoining flats) or in commercial property. Nor can you reinvest in overseas property.
HOT TIP: Exemption is also available for investments made in certain bonds or notified fund by central government within 6 months of sale of a capital asset. There is a cap of Rs 50 lakh on such investment.