Home Finance and Income-tax Planning
By Subhash Lakhotia
It is true that Housing is the engine of economic growth especially in the 21st Century.
This phenomena is true not merely for India but even for other developing countries of
the world. The development of the housing sector in different countries of the world, as
the statistics show have been instrumental in unprecedented economic growth of those
countries. India is no exception. The growth of housing sector which plays a prominent
role in nation building has been seen in the last decade. As a result of good growth in
housing sector, either at the government level or as a result of dynamic growth planned
by private builders the problem of providing housing for millions has been solved to a
partial extent. Home Finance plays the most vital role in the development of the housing
sector. The growth of housing sector still becomes very fast if home finance as well as
income-tax planning are added to the theme of house development in the country. Merely
six years back, to the small little investor housing loan was available at a peak interest
rate of 19% but the same housing loan is available to the small investor now even at the
rate of 9% per annum. Even for big investors who require housing loan of a bigger
volume, the interest rates are in the vicinity of 9.5% to 10% p.a. As a result of falling
interest rates on different investible instruments on the one hand while on the other hand
reduction of interest rates on housing loans in the last 36 months there has been a sharp
increase in the number of persons taking advantage of Home Finance. Whenever a person
is contemplating to take advantage of home finance which is nowadays freely and easily
available from different banks and other financial institutions, the prudent investor must
make a comparison of best available home finance with reference to the interest rate
payable on the loan coupled with processing charges, etc. Nowadays many house
financing organisations even offer floating rate of interest. In most cases it is better for
the investor to opt for floating rate of interest on the housing loan which enable the
investor to take advantage of the falling interest rates year after year. While taking the
house finance one should also study very carefully the details of annual rates, the terms
and conditions of repayment as also the terms and conditions in case of default. In the
succeeding paragraphs different aspects connected with Home Finance and income-tax
planning have been highlighted which would make the investor interested in taking
advantage of the comparatively cheap home finance now available. Apart from cheap
home finance, another big advantage in these days is that home finance is available
without much hassle and legal formalities. The speed of procuring home finance
especially in the competitive market is also very fast.
1.
The objective of Home Finance
Before launching to opt for taking advantage of Home Finance, it is time for you now to
decide your objective in advance. If the prospective investors with home finance decides
his objective in advance, it will help them in the process of tax planning. Merely taking
advantage of home finance without discussing and thinking of the objective may land the
investor in negative tax planning. Hence always one should decide in advance, the
focussed objective for home financing. For example, if the home finance is taken
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exclusively for the purpose of buying a residential property for self-use, greater tax
benefits would be available to a tax payer having high income as on today in comparison
with same home loan finance taken by a household lady having no income and taking
home finance for her residential property. Therefore, it is better to sit down and examine
the different aspects of home finance with a clear cut objective to achieve the desired
level of tax planning.
2.
Home Finance for self-occupied property
If the home finance is taken for self-occupied residential house property, it makes sense
to buy the property as far as possible in the name of a tax payer whose taxable income
under the Income-tax Law is very high as on today. This theme is suggested because of
the fact that under the provisions of the Income-tax Law any interest payment on home
finance for self occupied house property is allowed as a deduction to the extent of
Rs.1,50,000 per annum. This deduction is available from the total income of the tax
payer comprising of income from salary, income from house property, income from
business or profession, income from capital gains or income from other sources. The best
part is that even the employer of the tax payer who has taken the home loan is able to
give the benefit of tax deduction in respect of home finance interest payment especially
when the employee submits Form no. 12 C to the employer. However, it should be noted
that the benefit of tax deduction in respect of interest on home finance to the maximum
extent of Rs.1,50,000 per annum is available only when the housing loan is taken after 1st
April, 1999. Tax planning demands that if you have taken loan earlier, then better you
start repayment of the old whole loan, may be by taking new loan for the same house.
3.
Home Finance by DINKS
These days there has been of growth of Dinks (Double Income No Kids). Innumerable
young couple are seen who are just married and they have no children and both of them
are earning. Hence in respect of such Dinks home financing plays a very vital role in tax
planning of their income and saving income-tax just as a result of home finance. It is
recommended that in the case of Dinks, both of them should take loan from the Housing
Finance Companies and just taking loan by both of them would entitle them to enjoy the
benefit of tax haven in respect of interest paid for home finance. It would be worthwhile
for the Dinks to remember that even for one single house property which is jointly owned
by couples who are Dinks if both of them take the loan and make the repayment of the
loan as well as the interest, then under the Income-tax Law both of them are entitled to
tax deduction in respect of the interest payment on house finance. However, whenever
the property is jointly purchased by Dinks couples, they should ensure that the property is
jointly purchased with specific shares, which is clearly borne out by the title deed and
then both of them make the interest payment in tune with the prorata percentage of
ownership in their respective hands.
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4.
Home Finance by HUFs.
It is a well known fact that tax benefit is available for interest payment on home finance
to an individual. But most of the tax payers are not aware of the fact that the same tax
benefit is available to Hindu Undivided Family (HUF) if they opt for housing loans.
Thus, home finance can be used as a very good tool of tax planning even by HUFs for
building real estate with loan amount. In years to go the value of real estate will go up
while the money value will go down. Thus home finance should be used for tax planning
by HUFs like any other individual even for the HUFs, tax benefit for interest payment on
home finance is available for one residential property. So also tax rebate for repayment
of the loan. Home finance should better be used for rental real estate.
5.
Home Finance for Minor Children.
It is true that the income of the minor child will be clubbed with the income of father or
mother. This is because of the IT provisions contained in Section 64 of the Income-tax
Act, 1961. However, by taking advantage of Home Finance if a property especially the
commercial property is purchased in the name of the minor child which can even be
financed by the parents, then at a later stage when the child becomes a major child he
would become the proud owner of a commercial property right at the time of becoming
major. However, by proper planning of home finance loan and interest, the clubbing
provisions can be fully neutralised especially when the interest for home finance is equal
to the amount of rent received. Home Finance can also be availed for 100% specific
beneficiary trust of a major child or a minor child.
6.
Home Finance Tax Planning for Second Residential House.
If you are contemplating to make investments in a second residential house property, you
should be careful for interest payment in respect of home finance availed by you. If the
objective of second house is also for self-residential use, you will not enjoy tax deduction
in respect of interest on loan for the second residential house property. It therefore, makes
sense to make investments in the second residential house property and put it on rent so
that the interest on loan for house finance for the second residential house property would
be allowed as a deduction without any upper limit. This is so provided you use the
second house property as also subsequent house property for giving it on rent. Under the
Wealth-tax Law, one house property is exempted in Wealth-tax but the subsequent
residential properties if they are given on rent for more than 300 days in a year, then also
they become fully exempt under the provisions of Wealth-tax Law.
7.
Home Finance for Commercial use of the property.
In case a person avails home finance and makes use of the said home for commercial
exploitation then also the interest on such loan is allowed as deduction from the rental
income so received. Thus home finance can also be utilized as a tool for investing with
loan in such properties which result into commercial gain or advantage.
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8.
Home Finance for investment in Housing.
If home finance is availed for making investments in a property with the objective of
merely investing in the property and ultimately selling the property, then also the
advantage is available to the investor in the form of interest cost for financing the said
property. Thus, if a property is financed by taking loan the interest on the said loan can be
capitalized to the cost of the property which ultimately can be deducted from the selling
price of the property.
9.
Interest Payment of Home Finance
As mentioned above, the interest payments on home finance are allowed as a deduction
to individual tax payer from their income of the year. To claim the benefit of interest
payment in respect of home finance, the loan can be taken either from house finance
institutions, banks or private lenders. There is no provision in the Income-tax Law to
provide for a maximum rate of interest. Thus whatever interest has accrued to the tax
payer in respect of residential house finance with loan the same would be allowed as a
deduction. Such interest on loan for residential property or for let out property is allowed
as a deduction irrespective of the fact whether the interest amount has actually been paid
during the year or not paid or partly paid.
10.
Home Finance by Employer at Zero Interest.
In case the employee takes a loan from the employer and such loan is available at zero
interest, then the employee is taxed on the perquisite in respect of the said interest-free
loan by the employer. As per rule 3 (T)(i)of the Income-tax Rules, 1962 the perquisite
would be at the rate of 10% per annum on the loan amount so received as interest free by
the employee.
11.
Home Finance by Employer at Subsidised Interest Rate
Some times it is seen that as a part of welfare scheme and to encourage investments in the
housing sector the employer grants loan to the employees at subsidised rate of interest. In
such circumstances, the subsidised amount would be treated as a perquisite in the hands
of the employee. For example, if the employer grants housing loan to the employee at the
rate of 4% per annum only, then to arrive at the perquisite value in such situation in the
first stage, the value of perquisite will be determined at the rate of 10% on the loan
amount and from this the interest amount recovered by the employer will be deducted,
thus bringing to tax the interest subsidy granted to the employee. From the point of tax
planning it is advisable not to go in for interest subsidy because the employee will be
taxed on the subsidy amount but unfortunately will not be able to get tax benefit on
interest payment on that quantum of interest that otherwise has been subjected to tax as
perquisite because of the interest subsidy.
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12.
Home Finance interest deduction on accrual basis.
All those who make investment in house by taking loan may just remember that interest
for house finance is allowed as a tax deduction even when the interest has actually not
been paid. This is true even for house finance availed for residential house property for
self occupied use or for letting it out. Similarly, even for those persons who take home
finance for letting out commercial properties, the interest would be allowed as a
deduction even on accrual basis.
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Home finance through Interest-free loans
Under the Income-tax Law a person can take “Home Finance” from any relative or a
friend with interest on such loan. This is known as interest free loan. However, the
women tax payers should not receive any interest-free loans for house finance from her
husband, her father-in-law and her mother-in-law. Similarly, the husband should not take
interest-free loan from his wife. This provision is in tune with the provisions of section
64 (1) of the Income-tax Act, 1961. Thus, housing loans by the above mentioned persons
can be taken with reasonable interest on loan. Other than the above mentioned
restrictions the interest-free loan from other friends as well as relatives can be taken.
14.
Interest rate on home finance
Under the Income-tax Law there is no restriction on the rate of interest which can be
charged by the lender. However, from the point of personal finance planning one should
always compare the rates of interest on home finance offered by different finance
providers. One should also look at the terms of the loan amount as also the terms of
interest payment. One should make a comparison between a Fixed interest rate or a
Floating interest rate. The aspects connected with monthly rests or yearly rests as also
conditions relating to prepayment of the housing loan amount should also be seen in
advance. As far as taking housing loan from friends and relatives is concerned, the rate of
interest may vary depending upto the mutually agreed terms and conditions. Thus, the
interest to be charged by the family members can vary anything between 5% per annum
to 24% per annum all depending upon the final decision between the borrower as well as
the lenders. Thus suitable tax planning can be implemented in respect of interest for
home finance.
15.
Home Finance & Tax Planning for Salaried Employees.
For most of the salaried employees who receive house rent allowance from their
employer it is recommended that such class of tax payers to receive full tax benefits
should not take house finance in their name and construct a residential property. The best
scheme for such persons is to take “Home Finance” in the name of wife, HUF or other
major children. Later on, the salaried employee can make payment to these family
members on account of “Rent” and thus save substantial amount of income-tax on
“House Rent Allowance” so received from the employer.
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16.
Home Finance and Tax Planning for add-on names.
It is a well known fact that in respect of Home finance which is taken in the name of add
on name or the second name or the co-applicant in the loan application the benefit of tax
deduction on account of interest payment cannot be made available to such co-applicant
or add on home loan holder specially when such a person has not actually taken the loan
on his name and has not actually paid the interest on his own behalf. For example, if
home finance is taken in the name of a property owned by Mr. A with an add-on name of
his wife Mrs.A. Let us presume that interest for the home finance is Rs. 3 lakhs. Entire
interest has been paid by Mr. A only. Now on these facts Mrs. A cannot enjoy any tax
benefits in respect of interest on loan because she is the add-on person with no actual
payment of interest on loan by her.
16.
Tax Rebates for Home Finance repayment
As per Section 88 of the Income-tax Act, rebate is available to individual tax payers on
payment of house finance loan to the maximum extent of Rs.20,000 per annum. This tax
rebate is @20% for tax payers having taxable income upto Rs. 1,50,000 and @ 15% for
tax payers having income in excess Rs.1,50,000 but upto Rs. 5 lakhs. However, there is
no tax rebate if income exceeds Rs. 5 lakhs per annum. This tax rebate is only in respect
of loan borrowed from Government, Bank, LIC, NHB, institutions engaged in providing
long-term finance for purchase of a residential house or selected employers. The tax
rebate would include payment of instalment or part repayment of amount under self
financing.
17.
Home Finance for Home Repairs and Renovation.
If home finance is taken for home repairs or home renovation, then also the interest on
such loan would be allowed as a deduction to the tax payer within the overall limit of
interest on self-occupied property upto Rs. 1,50,000 p.a..
18.
Securitization makes Home Finance Lucrative.
The concept of securitization is comparatively new in India. It makes a sense now to take
house finance for all those properties which are to be let out so that with the extension of
securitization facility the interest burden of home finance can be reduced.
19.
Liberal recovery law makes Home Finance good business.
In the past to recover the amount in respect of house finance was a big problem. These
days the recovery procedure is becoming very simple day by day with the result that
Home finance with mortgage is becoming a lucrative business with less hassles and
tensions in comparison with the situation prevailing a few years ago.
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20.
House Finance in the context of Kelkar Report
The Kelkar report on Task Force on Direct Taxes presents various recommendations
which will have a very negative impact on house finance sector. The deduction of
interest on housing loan upto Rs. 1,50,000 on account of self-occupied house property
has been proposed by the Kelkar Committee to be ultimately not allowed as a deduction.
Similarly, the tax rebate u/s 88 is proposed to be deleted. In case both these
recommendations are accepted, then surely the housing finance sector will have its worst
blow on the growth programme. The Finance Ministry should not accept the
recommendations of the Kelkar Committee on this front otherwise the House Finance
culture which has been built in the last few years would become a thing of the past which
will ultimately result in negative growth of housing sector.
Conclusion
In conclusion, we can say that Home Finance plays a very vital role in the development
of the housing sector in our country. The income-tax planing aspects as are applicable to
home finance further adds to the attraction of individual tax payers in planning personal
finances with the objective of all round tax saving.
The author is tax and investment consultant for the last over 30 years. E-mail:
slakhoti@satyam.net.in : Mailing address- Subhash Lakhotia, S-228, Greater Kailash
Part-II, New Delhi –110 048: Phone – 26415434.
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