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Options to cut down on your tax liability
Prudent choice: Property investment can help you in many ways to lower your tax liability.
Property, often, is considered an instrument to boost wealth. In fact, an allocation towards real estate is a must if you are thinking of building wealth over the long term. In recent times, an investment into property has taken different dimensions. Besides building a home for self-occupation, many have invested in property to cut down tax liability. In this article, we discuss the options for cutting down your tax through an investment in property and also explain certai
n myths about these tax benefits.
The tax benefit available on home loans has become synonymous with the salaried class. However, investment in a property can also be a good option for the self-employed. These individuals too can take a loan for the purchase of property and claim the benefits of tax under Section 24 of the Income Tax Act. While such a benefit is automatically available when the property is purchased for self occupation, it needs a different treatment when the property is let out.
The set off
When an individual invests in a property for renting out, the interest paid on home loan would be set off against the rental income. In addition, additional expenses such as municipal taxes would set off against the rental income.
The balance sum arrived at, is considered the annual value of the property and from this sum, 30 per cent is allowed as deduction as cost towards repairs and maintenance.
In the case of self-occupied property it is already well known that the interest amount up to a limit of Rs.1.5 lakhs would be allowed as deduction under Section 24 of the Income Tax Act. Also, the amount paid towards principal too comes under tax benefit but under a different section – 80C. So, those who invest in tax saving instruments, can do so after taking into account their contribution towards principal repayment. As per the latest budget, this limit has been hiked to Rs.1 lakh.
Commercial property
However, the home loan benefit is often mistaken with loan for land needed for the construction of property. Also one has to keep in mind that loans taken for the purchase of land do not offer any tax benefit. On the other hand, those who invest in property purely from tax purposes can consider investing in commercial property as it offers exemption from wealth tax.
The added advantage in the case of commercial property is that there is no concept of notional value for property unlike a residential property. As you are aware, when an individual owns more than one property for self-occupation, the concept of notional rental value kicks even if the property is not let out.
There are no such hassles in the case of commercial property.
That is one of the reasons why a number of individuals, particularly high networth individuals have begun to look at commercial property for investments. Not only do they provide better yield on investments as rentals are higher but also offer additional tax benefits.
Irrespective of the purpose of the loan, the borrowers however, need to keep an eye on the interest rate and should balance their loan portfolio accordingly.
For instance, the case of individual home loans, pre-payment may prove advantageous after a certain period if the interest outgo on the loan comes down drastically. Generally, such a situation arises when the (balance) loan tenure gets shorter.
SRIKALA BHASHYAM
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