Buy a house on loan and receive tax rebates

The other day when my chartered accountant was busy computing my taxes he gave me a bit of good news (rather rare for a chartered accountant) that if I had constructed/bought my house/apartment funded partly by a loan taken from my provident fund, a Housing Finance Corporation, a bank or my employer I would get a massive rebate in that dreaded income tax. And there was more to come.

He also informed me that if I was using one floor and renting out the other, instead of paying income tax on rental income, I could actually get an income tax refund! I doubted that such a miracle could take place but he soon told me the nitty gritties of the deal.

He said that in case of a self-occupied property interest paid upto Rs150,000 per annum is deductible. Since there is no rental income from a self-occupied house, such interest can be adjusted from other sources of income, thus enabling me to get a part refund of Tax Deduction at Source, which was cut from my salary or other income. This rebate is admissible year after year, provided the construction is completed before April 1, 2003.

However, he warned me that if I decided to rent out the house to augment my income, the limit of Rs150,000 would not be applicable and the interest paid would be deductible from the income I was earning from the rent I was getting.

However the other bit of good news is that more often than not, interest payable in the first year is always more than the net income one gets from the rent (after rebate for house tax, repairs etc) and such excess interest paid over the net rental income is adjustable from other sources of income. In the same manner this will reduce the gross taxable income from all sources entitling one to substantial tax refunds.

Deductions are not restricted to interest alone. The repayment of a housing loan upto Rs. 20,000 per annum also gives 20 per cent tax rebate (beside surcharge) under section 88 of the Income Tax Act.

So with property prices having stabilised and with the cut in interest rates on housing loans that were recently announced by the Finance Minister Yashwant Sinha and the substantial tax rebates, now is as good a time as any to invest in that house. So if one decides to go in for a house loan in order to buy ones own ashiaana then why not get the rebates also.

For this one will have to be able to compute the taxable income/adjustable loss under the head; Income from house property. This is a tricky business so let me pass on the tips that my ever-obliging CA gave me.

Well to begin with, he said if I want to occupy the property for my own use that makes it Self-Occupied. So in such a case the annual value of the house is taken as nil. If, however, I choose to occupy the house for part of the year and rent it out for the remaining part of the year, then the annual value will be proportionately taken for the Rented out Period.

Also if one is lucky enough to have more than one house, which are also used for residential purposes, then in such a scenario only one house can be treated as Self-Occupied‚ and other properties would be deemed let out and taxed accordingly at notional income to be worked on the basis of Let out Property.

Also one might have a house, but is unable to occupy it because one has to reside at some other place owning to ones profession. Then the annual value is to be taken at Nil under Section 23 (3), provided the house is not actually let out and no other benefit is derived by the owner except for self occupation, for any part of the year.

Now once the Annual Value is determined, which would be Nil for a self-occupied house which cannot be occupied one should claim admissible deductions embodied under Section 24 of the Income Tax Act. Now we come to Rented Out‚ property.

One should find out the annual value, which is generally the actual rent received. From this annual value, deduct all municipal taxes paid during the year. One should remember that it is the payment which matters and thus, if taxes are due but not paid, no deduction is admissible.

On the other hand, if you are a good citizen and pay arrears/advance house tax, you can get a rebate for the amount actually paid provided deduction for arrears is denied if it was claimed and allowed in an earlier year. This would be the Net Annual Value‚ for rented out property.

Subtract the admissible deduction from this and you get the taxable income from house property. It is also vital to keep in mind that deductions are admissible, only after the house is complete and is not under construction.

Nonetheless, the interest you have to pay on borrowings till the time the house gets completed can also be claimed. But, such interest is not admissible during the year it is incurred.

One-fifth of such total interest is deductible in the first consecutive five years, once the construction is complete, commencing from the year in which the house gets completed. So go ahead buy that house on a loan and avail of as many tax rebates as the government is willing to give you.

R. Dyes is a journalist based in New Delhi.