In a population heavy country like ours, there will always be a net surplus of house hunters over houses available. This is why tomorrow’s price will most certainly outdistance today’s, which, by itself is beyond the reach of most of us. There are three good reasons for treating the purchase of house property as an intrinsic part of overall investment strategy:
- The rent which would have been paid for a similar property in the same or similar locality is no longer required to be paid, and hence, in effect it is a notional income. In fact, this ‘fair rent’ is brought under the ambit of tax by the ITA.
- Investment in house property, as in the case of shares or bullion serves as a hedge against inflation. However, here there’s a flipside. In practice, unless you are in the real estate business, buying a house is not an investment, but consumption.
- Normally, the repayment is in installments. When the market price keeps pace with inflation and when your own income is expected to rise, you make payment against the original price with money that becomes cheaper day by day. You should therefore explore various avenues for taking loans against mortgage of your house.
The first aspect related to property purchase that we propose to cover is mortgage interest.
First of all, as readers would be aware, the interest payable on capital borrowed (inclusive of processing fee) for acquiring, constructing (as well as repairing, renewing or reconstructing) the property is tax deductible with a ceiling of Rs 30,000 on self-occupied property. The enhanced limit of Rs 2,00,000 is applicable on loans taken on or after 1.4.99 but only for acquiring or constructing. The lower limit of ` 30,000 continues to be applicable for loans taken for repairing, renewing or reconstructing. Complicated indeed!
This enhanced limit has two caveats —
- a) The acquisition or construction had to be completed within three years from the end of the year during which the loan is taken. The recent Budget 2016 has raised this limit of 3 years to 5 years. and
- b) The assessee should obtain a certificate from the lender that such interest was payable on the amount advanced for acquisition or construction of the house, or as refinance of the principal amount outstanding under an earlier loan taken.
There is no stipulation regarding date of commencement of construction. Consequently, construction of the residential house could have commenced before 1.4.99, but as long as it is completed within 5 years, from the end of the FY in which capital was borrowed, the higher limit would be available.
There is no restriction on the number of housing loans taken and also on properties taken on loans. The limit on deduction will apply to all the loans taken together.
The limit of Rs 30,000 or Rs 2,00,000 is applicable only on interest related with a self-occupied house. If an assessee has two or more residential houses, only one of these of his choice shall be treated as self-occupied. Others will be treated as deemed let out. For interest related with a let-out or deemed let-out house and commercial property, the entire interest is deductible.
Interest of Pre-construction Period: Both the deductions u/s 80C and 24 are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value should be known.
If the construction or acquisition is completed anytime in a FY, the interest paid during the entire FY is deemed to be the normal interest though a part of the FY is pre-construction period.
Next week, we shall discuss more such issues on the subject of housing and related matters.
(The authors may be contacted at firstname.lastname@example.org)