Save Tax on House Renting, Selling and Owning – Tax Tips

I was playing a game last weekend. The game is that you tell a word and the other person says the first thing associated with that word that comes to his / her mind. When I mentioned “House” to my friend, the first thing that came to her mind was “Loan”.

More often than not housing nowadays is associated with Liability / Loan. And renting a house is associated with large outflows. So, how to make the most out of owning or renting a house? Read on to find out.

Who doesn’t want to save taxes on house? Indian Income tax provisions contain provisions relating to renting a house, owning a house and also on selling a house. I am attempting to highlight a few tax provisions pertaining to those areas.

Save Tax on – Renting a house

Many of us avail the benefit of HRA. There is a simple formula to calculate the optimum usage for HRA. See my article on “save tax on salary” to find out more.

People often think that HRA is only for the salaried class. But business people hear hear! There are provisions in the Income tax that enable even the self-employed people to avail benefit for HRA.

Let me illustrate how to utilize that benefit. For anyone who does not draw salary and does not own a house, section 80GG of the Income tax act, 1961 gives your that benefit to the least of the following:

  • Actual rent paid in excess of 10% of your total income
  • Rs. 2,000 per month
  • 25% of the total income

Here total income is the “Total Income” as defined in the Income tax Act before allowing for this deduction. That is, the taxable income after allowing for all deductions except 80GG.

Now, for the salaried class, there are also the provisions relating to rent free accommodation.

What is rent free accommodation? As the name suggests, this is the value of place of stay provided by the employer to the employee that is either provided free or at a subsidized rate. The calculation metrics for rent free accommodation are as under:

  • 15%* of salary if the accommodation is owned by the employer or
  • Lower of actual rent paid by the employer and 15%* of salary if the accommodation is not owned by the employer

*% varies as per the population of the city. 15% is applicable for population exceeding 25 lakhs as per 2001 census

In both the above cases, subsidy value provided to employee will be reduced. Note that the employee does not receive money value for the accommodation provided and hence is a perquisite that will be added to the salary. Therefore, not many companies opt for this provision.

Save Tax on – Owning a house

Now, this is a section that will need a full paper for me to explain in detail. Hence, I will touch upon the essence of these provisions as entailed in the Income tax Act.

One common misconception is that Interest paid on borrowed capital for purchase/construction/renovation of house can be claimed only upto Rs. 1,50,000/-. Well, that’s not true. Here is a snapshot of the difference between self-occupied and let out property:

Self-occupied Let out
Income from self-occupied property is considered to be “nil”. Note that the number of properties will be limited to one. Annual value ie, higher of Actual rent, market rent, municipal valuation or rent specified as per the rent control act will be considered as income
Deduction on account of Interest on borrowed capital is capped at Rs. 1,50,000/- Deduction can be claimed on the total interest paid during the financial year
No deduction allowed for the municipal taxes paid Municipal taxes paid during the financial year can be claimed as a deduction
No deductions for repairs and maintenance 30% of annual value can be claimed as deduction for repairs and maintenance

Now, let us look at an illustration to understand the implications better.

Category Rs. Self-occupied Let out
Rent value 40,000 pm 0 480,000
Municipal taxes paid 12,000 pa 0 12,000
Deduction for Interest 600,000 pa 150,000 600,000
Deduction for repairs irrespective of actual incurred 0 0 140,400
Total -150,000 -272,400

So, if you own a second home and a large dream home, do not despair. It might be more profitable to have it deemed to be let out!

Another misconception about owning a property is that you cannot claim HRA as well as Interest on self-occupied property. But, there is one little clause that says that there is an exception to this golden rule.

In case the place of work is other than the place where your property is situated, then you will be eligible to claim both HRA as well as Interest on self-occupied property. However, it needs to be sufficiently established that the property is indeed not being let out.

Save Tax on – Selling a house

Selling of house generates money as per the market value whereas the amount invested on the same may not be the same. So, the gap between the amount realized and the amount invested is either a gain or loss that is governed by the Capital Gains provisions in the Income tax act.

It is good to note that this tax can be limited if the profits on account of such a sale can be re-invested into another residential property. However, such reinvestment has to be made within the prescribed time and is subject to certain conditions. A separate article is being released covering those provisions in detail.

Save Tax on – Buildings used in Business

For the business people out there, depreciation can be claimed on buildings used for business purpose. The rates at which depreciation can be claimed are as follows:

  • Buildings used for residential purpose except hotels and boarding houses – 5%
  • Buildings other than those used for residential purpose – 10%
  • Temporary structures – 100%

Save Tax on – Reverse mortgage of property

This option is another important and simple way of having a regular income that does not attract any tax liability. This scheme is available for senior citizen (above 60 years) who own property. They can mortgage their property with any bank or Housing Finance corporation for upto 60% of its value.

The period of mortgage will be of 15 years. Since the amount received is a loan, there is no question of income and hence, no question of tax. Once the borrower leaves the property or upon the death of the borrower, the bank has a right to liquidate the property and pass on the proceeds after recovery of principal and interest to the borrower or legal heirs.

Now you know that a house can save taxes. So, the next time your home loan looks huge or when you think that your house is a liability, stop to think about the benefits. I hope that the first thing that comes to your mind when one says “house” is “Income” or “tax savings”.

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About the Author

Supriya Mothay is a Chartered accountant by profession, with a passion to write. Being an amateur poet and creative writer, she now blogs on topics on finances, lifestyle and mythology. She likes to relate little philosophies to life and has a capability to break down trivial issues at the granular level and arrive at innovative solutions.

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