During
the last few years, the investment scenario in the country has significantly
changed as interest rates have fallen very sharply. Fixed deposits
that were once the staple and no discussion required, readymade, one for all
type investment has in today’s scenario lost its worth, totally. The
post tax real rate of return is just equivalent to inflation. Similar
is the story with postal schemes or relief bonds and all of them have seen a
downward trend. The gross yield from these once very investibleinstruments have almost halved.
In this
situation it is now time that the investor should shift his focus on real
estate investment. Also, causative to the decision is the rigged up
stock market. In the changed scenario it is high time that all
investors, and more particularly high net-worth investors, shifted their
investment pattern from movable assets to immovable assets in the form of
commercial building or residential building.
In this
soft interest regime, the best time to own a property is: Now. Interest rates
have bottomed out and are even showing signs of firming up. Tax is
an important consideration while planning any investment and Real Estate is no
different. With so many tax incentives on demand side in both Income
Tax and Wealth Tax, it is very important that the investment be meticulously
planned on tax front so that maximum benefits are taken. The article
is a modest endeavour to bring out general principles for not so expert common
man, so that he may broadly ensure that the transaction is best suited to his
tax return.
As
regards Property for self-occupation or dwelling by self or any member of the
family, one of the most important rules for tax planning while buying a house
property in India is that one should own only one house or a part thereof in
the form of a flat or apartment. Section 23 of the Income Tax act
allows exemption for only one self-occupied property. In case two houses were
self-occupied by an assessee, one of them would be deemed to be let out and the
annual value of the same shall be chargeable to tax. So if you do
not own a house, buy it in any name, no discussions required. If a
second house for self-occupation were desired, then the best course is to
acquire the same in the name and through the funds of any other member of the
family like, wife or major son or major daughter or brother or sister or father
or mother or the Hindu Undivided Family.
In
respect of properties that are self occupied, no deduction regarding the
municipal tax paid or any other expenditure like Insurance is allowed under any
of the provisions of the act. However the interest paid on any
amount borrowed for the purpose of acquisition of such a house is allowed as a
deduction upto a maximum of rupees one lakh fifty thousand under the provisions
of Section 24(1) (b) of the act. Further the amount paid towards
principal is allowed as a deduction subject to the maximum ceiling of rupees
one lakh under section 80C of the act. It is almost as if the whole
of your income you invest in a house property has been exempted from tax.
The loss
generated under the head ‘Income from house property’ due to the deduction of
interest is allowed as a set off against any income of the same year under any
other head. The loss that could not be so adjusted due to no other
income or insufficient income would be allowed to be carried forward for the
next eight assessment years to be set off against any income from house
property arising in future years.
If an
investor is interested in acquiring residential house properties for renting
purposes, then it is beneficial to acquire such properties in different names
i.e. through funds different members of the family. This is
particularly beneficial when different members fall in different tax brackets.
However,
in some cases, there may not be any great incidence of income tax, if an
investor were to acquire one house property for self-occupation and other house
property for letting out. In such a case, one property or flat or
apartment used for self-occupation would be completely exempt from income tax
whereas the other house would be liable to income tax in respect of net income
from it.
In
respect of rental income, the municipal tax paid is allowed as a
deduction. On the net income, a statutory deduction of 30% is
allowed towards all expenditure incurred by the assessee for maintaining the
property and collection of rent. If there is any interest payable in respect of
funds borrowed by the asses-see for the acquisition of the property or for
repairs to the property, then the said interest, whether paid or not, would
also be deductible in computing the net income from house property u/s24(1)(b)
without any limits as to the maximum amount.
Any loss
under the head ‘house property’ from a rented out property is allowed as a
deduction on similar lines as that of self occupied property.
The
taxman is really interested in making you buy a house. There are
deductions in respect of other income on acquiring a House. If the
assessee is not the owner of more than one residential house property and has
long term capital gains on the sale of any other asset like commercial house
property, jewellery, open land etc., then he can get 100 per cent tax exemption
u/s 54 in respect of long-term capital gains made on the sale of such capital
asset provided he invests the same in a residential house property. This
is not all. There are deductions when you sell these properties.
If an
assessee is interested in selling residential house properties, whether one or
more, he would be eligible to get 100 per cent exemption in respect of
long-term capital gains (i.e. where the house property is kept for more than
three years since acquisition) if the amount of long term capital gains is
invested in the purchase of another residential house property in advance
within one year of the date of sale of the first house property or within two
years after the date of said sale in another property by way of purchase or
within 3 years by way of construction. Great isn’t it? However,
100 per cent exemption from long-term capital gains can be secured only subject
to some procedural rules regarding keeping the unspent amount in a bank namely,
‘The Capital Gains Account Scheme’. But that is too easy.
Now as
regards the wealth tax, you are not disappointed after studying Income Tax as
the assessee can have the following exemptions. One there is an
exemption not only for the commercial property used for one’s own business or
profession but also for all commercial complexes and commercial buildings from
the levy of wealth-tax. Besides, if any individual is the owner of
only one house property or a plot of land upto 500sq.mts, he would be granted
complete exemption in respect of the same from wealth-tax under the provisions
of section 5 thereof. Besides, all residential properties let out
for a minimum of 300 days in a year would be completely exempted from
wealth-tax. Likewise, the open land for development purposes would
be exempt from tax for a period of ten years.
Thus, in
respect of real estate transactions, an investor can save a good deal of income
tax and wealth-tax through proper tax planning. The time has come,
what are you waiting for?
No comments:
Post a Comment