Lessons: Tax Savings on Home Ownership
Nisha and Narain bought two houses and is paying Equated Monthly Installments (EMI) for both. She wants to know how to get maximum tax rebate on it.
“My husband and I are working professionals.
Two years ago, I had purchased an apartment for Rs 10 lakh. For convenience sake, let’s call it apartment ‘A’. I took a home loan of Rs 6.5 lakh to fund this house purchase. So far, I have repaid an interest of Rs 50,000 and a principal amount of Rs 50,000.
Later, I purchased another apartment, lets call it ‘B’, and took another home loan of Rs 36 lakh. Again, I repaid an interest of Rs 3.3 lakh and a principal amount of Rs 30,000 on this apartment.
Now, My husband an I need to decide which house to rent out so that we can save some money and also avail maximum tax benefits at the same time.
Currently, I’m paying the monthly installments for both the apartments.”
– Nisha and Narain
Calculations reveal that Nisha needs to rent out her apartment ‘A’. Let’s decode this.
Section 80C offers tax rebate on home loans upto a limit of Rs 1 lakh and Section 24 on interest upto a limit of Rs 1.5 lakh.
It is clear from the loan repayments made by Nisha that though she avails a tax rebate of 50,000 on apartment A compared to apartment B, her tax rebate for apartment B would be more significant, as she can avail a rebate of Rs 1.5 lakh for the interest of Rs 3.3 lakh repaid so far.
So, Nisha could do two things:
- Declare apartment A as rental property
- Her husband, Narain could pay rent to Nisha and take benefit of house rent allowance or HRA benefit on his salary
However, Nisha would then have to pay tax on the rental income since the rent received will be treated as income.
Let’s assume the rental income for the apartment is Rs 100. As part of deductions before tax, 30 per cent of the income is deductible towards maintenance. This then leaves Rs 70 as the taxable income.
Ideally, in a situation like this, it is best to opt for a joint home loan. Narain and Nisha could have done the same. Since they both are salaried employees, they can club both their incomes and avail of a higher loan. The obvious advantage is the increase in loan eligibility. Banks often insist that co-owners of the property, should be co-borrowers as well. Being co-owners and repaying a joint home loan would entitle both Narain and Nisha for higher tax benefits jointly. They can avail these benefits according to the proportion of their individual shares of the loan.
Source: Bank Bazar