A roof over your head is a big security, but a house also offers you tax incentives, whether you own it or rent it. M.B. Rajkumar, who recently bought a home in Hyderabad, knows it well. He claims tax breaks on the home loan interest and principal amount, and because he lives on rent in Delhi, he also gets the benefit of HRA. You might not be able to have your cake and eat it too like Rajkumar, but you can definitely maximise the benefits you get from your house.
Lowest of three calculations is the exemption on HRA | ||
|---|---|---|
| i. HRA received | ii. 40% of basic pay (50% in metros) | iii. Rent paid minus 10% basic |
| If a person living in Chennai has a basic salary of Rs 40,000 a month, an HRA of Rs 15,000 and pays Rs 18,000 as rent, his exemption calculation will be: | ||
| i. 15,000 | ii. 20,000 | iii. 14,000 |
| The third figure being the least, only Rs 14,000 of the HRA will be exempt from tax. The balance Rs 1,000 will be taxed at the normal rate. | ||
Owners: Almost everyone who buys a house these days takes a home loan. Even if you have enough cash to pay outright, it makes sense to take a loan to at least partly fund your home. Here's why. Up to Rs 1.5 lakh a year paid as interest can be set off as loss from your salary or business income for self-occupied property (if property was acquired before 1 April 1999, an interest of up to Rs 30,000 a year is set off). If the property is under construction, the interest amount paid during construction can be deducted under Section 24. You can also claim deduction under Section 80C. If you take a loan for renovation, an interest of up to Rs 30,000 a year is allowed as deduction.
Tenants: The house rent allowance or HRA is given by an employer to an employee who is staying in a rented property and the rent exceeds 10% of the basic salary. Like Rajkumar, you can claim HRA even if you own a house but do not live in it.
What if the HRA is not a part of your salary component? You can still claim tax benefits under Section 80GG by filing a declaration on Form 10BA regarding the expenditure incurred towards rent. The maximum amount of benefit that can be claimed under section 80GG is the least of the following: Rs 2,000 per month, 25% of total income and rent paid minus 10% of the total income.
Landlords: For whatever reason, you might decide to let out your house while living on rent. You can still claim HRA benefits, but the rent received is taxable.
If you let out a second house, the entire interest paid is deductible from your taxable income after computing the rental income. While calculating the income for that property, you can deduct municipal taxes from the amount of rent receivable as well as a standard deduction equal to 30% of the annual value. You can also claim deduction on interest paid on loans taken for repairing or renewing your property.
Sellers: Never mind the price you get for your house - even in times like these. Will the taxman get a good chunk of the going rate? If you have owned the house for over three years before selling it, you can take advantage of the fact that the sale is considered a longterm capital gain and is taxed at a lower rate than short-term capital gains. "This provision has helped countless taxpayers to move into bigger and better houses at the cost of the exchequer by saving income tax on long-term capital gains," says Harsh Roongta of Apnaloan. You can save on long-term capital gains too by buying a new house within a year of selling or within two years from the date of transfer. You can also invest in capital gains bonds issued by the Nabard, REC and NHAI.
If you sell at a lower price than the one you bought it at, the capital loss can be carried forward for eight assessment years. However, longterm capital loss can be set off only against a long-term capital gain.
Reverse mortgage: A home owner (senior citizen) can pledge his property to a lender in return for a lump sum or periodic payments spread over the borrower's lifetime. The owner is not obliged to repay the loan during his lifetime. On his death or on leaving the house permanently, the loan is repaid along with the accumulated interest through the sale of the house. Any excess amount is remitted to the borrower or his heirs. The amount that one gets is completely tax-free because it is not treated as 'income', but as a 'loan' in your hands.
Case Study
M.B. Rajkumar, 28, Delhi
Home loan and tax benefit details:
His tax plan for 2008-9 | ||
|---|---|---|
| Section 80C | His plan (Rs) | Our suggestion (Rs) |
| PF | 24,000 | 24,000 |
| ELSS | Nil | Nil |
| Ulip | Nil | Nil |
| Insurance | Nil | 5,000 |
| Home loan | 25,000 | 25,000 |
| Total | 49,000 | 54,000 |
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