THROUGH generations, Indians have not only learnt, but also mastered the art of 'saving' and 'investing'. In our country, we save not just to meet contingencies, but also for growth that will support the future of our progeny. As a civilisation, we also emotionally bond with our immovable property, especially in our homes. Besides these s ofter intangibles derived by investing in house property, the following tax benefits can be a compelling reason to buy property.
Where house property is purchased using loaned funds, the owner is eligible for a deduction of . 100,000 towards repayment of the principal amount of the housing loan. This deduction is however, subject to an overall cap along with various other prescribed investments under Section 80C of the Act. It is important to note that this benefit is not envisaged under the provisions of the new Direct Tax Code that will come into effect from April 1, 2012.
House owners are also allowed to claim the interest on housing loan as deduction from the taxable income. The benefit on account of de-duction for interest on housing loan is illustrated below:
Consider an example of two persons A and B. Their annual salaries are . 10,00,000 and they are entitled to an HRA of 20,000 per month. A stays in a self-occupied property and 'B' in a rented house (rent per month 15,000) in the same locality. A has borrowed 30,00,000 @ 10% per annum and the cost of the property is 30,00,000. In 20 years, total outflow of A would be . 6,948,240 (including interest of 3,948,240) towards repayment of loan. Assuming increase in rentals @ 6% per annum, B's outflows will be 6,621,406 in 20 years.
The tax savings by A and B would also significantly differ. While A will be entitled to claim deduction of interest up to 1,50,000, B will be entitled to claim HRA of approximately 1,20,000. However, as the tenure of home loan decreases, the tax savings earned by A on the interest would decrease vis-à-vis the tax savings of B on account of HRA. In this case, it is worthwhile to note that the appreciated value of A's property will be manifold at the end of 20 years, while, B would not create any new asset.
The benefit of interest deductions continue to exist in the proposed new Direct Tax Code.
In addition to the above, investment in a house property is also eligible for exemption from payment of capital gains subject to fulfillment of certain conditions. To avail this benefit, the taxpayer would have to invest/reinvest the capital gains for purchasing HP. Such exemption is available only if the capital gain is a long-term and arises due to transfer of any long-term capital asset.
The new Direct Tax Code also provides for similar exemption in respect of long-term capital gains. Accordingly, investment in HP can be explored where any person wishes to reduce tax liability in respect of long-term capital gains.
