One can get many tax benefits by purchasing a house or property. There are as many as three benefits for purchasing a property. The three benefits are as under.
- Capital appreciation
- Rental income
- Tax exemptions
One can think about purchasing a property now days are not a cup of tea because the property prices are very high. But one can calculate about the housing loan in which one can save income tax as much as interest paid. The complete article about income tax on property is as follows.
Housing loan
Housing loan or home loan is a great tax saving instrument in income tax in India. One can get tax exemption on interest as well as on principal amount. Under section 80C of income tax act, a maximum of Rs. 1 Lakh can be claimed on the principal amount of housing loan. Under section 24, a maximum of Rs 1.5 lakh can be deducted from taxable income. There is a condition that the property should be constructed or acquired within three years from the day when the loan has been taken.
Interest is deductible on accrual basis on home loan.
One can get interest benefits only by taking home loan from friends or relatives too with a valid proof. But one can't get exemption on principal in this case.
Second house
There is complete different tax implication on buying a second house. If one has own two properties, one of them (Owner can decide) will be deemed as let out even if not in reality. There will be notional rental income of the assesse who has own two properties and tax is applicable on it. One can get any exemption of income tax on principal amount if loan is taken.
The additional house also attracts wealth tax and 1 percent wealth tax is applicable on the value exceeding Rs. 30 lakh.
Rental income
One can get tax benefits on the second home too. One can deduct municipal taxes as well as 30% of the rental income from the rent for calculation of income tax.
Like, if A gets the rent of Rs. 20,000 per month from letting out the second property. The annual rent
will be Rs. 240,000. If A pays Rs. 20, 000 as municipal tax. Municipal tax as well as 66,000 (220,000X30%) will be exempt from the rental income. It means the rental income will be (240000-20000-66000=) Rs. 154,000.00 only. If A has housing loan on this property and interest amount is more than actual rent received (Rs. 154,000.00), entire rent amount will be tax free.
Under construction
The law is changed in the condition of property under construction. One can get the interest exemption on this property loan but the principal amount paid before the completion of property is not exempted under section 80C of income tax act.
Buying land
There is no exemption available under income tax act on loan against buying a piece of land either retain or let out.
Commercial property
No exemption available under section 80C of income tax act on commercial property. But wealth tax is exempted on commercial property.
Capital gain
If the property is sold after three years from the purchase date, long term capital gain will be applicable and the rate is 20% with the benefits of Cost Inflation Index otherwise 10%
One can save the capital gain if the total amount of the sale of property is invested in buying residential property or buy REC (Rural Electrification Corporation) or NHAI (National highway authority of India) bonds. Tax exemption on capital gain will only be available if total amount invested in buying a residential property within 2 years or construct a residential property in 3 years.
Joint property
If the property is co-owned, both of them can claim exemptions individually as per the share in the loan. Like if husband and wife are co-owners of the property, they can claim exemption individually. But the condition is that all co-borrowers must be co-owners.
House rent allowance
There are three aspects with house rent allowance which are as under.
- If one is living in a house for which home loan is taken, one can gets exemption under section 24 and 80C of income tax and not house rent allowance rebate.
- If one has taken home loan for constructing a house and living in a rented house, no tax rebates are allowed but house rent allowance allowed.
- If one has rented out his own house and living in a rented home, one can get both the income tax benefits and house rent allowance benefit. But the rented income will be include in the personal income which calculating the income tax.
Note: This article is only for the general information of the readers. In case you need more details/clarifications, please contact your Tax Consultant or a Chartered Accountant. Errors and Omissions are expected.
Best Regards
Prakash Nair
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