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If you want to buy a house, you have two options — take a loan or use your own funds. The way the property market is currently headed, most of us may not be able to afford an outright purchase without availing of any loan whatsoever. However, even those fortunate few who have the wherewithal to buy a house off the shelf, should take a loan.
For starters, interest outgo on the loan up to Rs 1.5 lakh is tax deductible. Moreover, the capital repayments are eligible for Sec. 80C deduction up to Rs 1 lakh. This is for a single property.
In the case of more than one property, while on the one hand it is taxed on a notional rent basis (even if not rented out), on the other, the entire interest paid is tax deductible. In other words, the limit of Rs 1.5 lakh is not applicable from the second property onwards.
Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits available for someone who wants to buy property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.
Maximising tax benefit
Property can be co-owned and each co-owner is eligible for the tax benefits. However, certain points should be kept in mind to extract the maximum tax benefit. All co-owners should be co-applicants for the loan. This is extremely important from the point of view of the tax benefits.
Take the case of a husband-wife combination. While buying the property, both should have an equal share. Also, the loan should also be taken equally and the interest and principal payments for the same should be made separately by each.
If the above is carried out, each is individually entitled to an interest deduction of up to Rs 1.50 lakh under Sec. 24 and a principal deduction of Rs 1 lakh under Sec. 80C. This way, between the two, up to Rs 5 lakh of income can escape tax.
Putting it differently, to avail of the tax breaks, the asset has to belong to the person. Possibly because they are unaware of this principle, taxpayers often make their property purchases in anomalous ways.
The house may be purchased in the wife’s name, though it is being financed by a joint loan with equal monthly instalments (EMIs) being paid by both husband and wife. This is possible as the purchase agreement with the builder is distinct from the agreement with the housing finance company.
If the housing finance company feels that the wife’s income alone is not enough to service the loan, it may insist on the husband being a co-applicant. However, realise that the husband is paying for something that does not belong to him. Conversely, the same principle is applicable where the house is purchased in joint names but the entire EMI comes from the husband. In this case, too, the husband pays for 50% of an asset that does not belong to him.
Therefore it is best to co-own the house in equal shares and take a joint loan. Though not strictly necessary, it would be convenient to have separate joint accounts to pay the interest and principal equally and this way, each one is entitled to a maximum of Rs 1.50 lakh on interest payments and Rs 1 lakh on principal repayments, making it a total of Rs 5 lakh.
Salary TDS and second house property
Let us briefly deliberate on the tax deducted at source (TDS) treatment on salary in the case of an employee who has purchased a second house property. Readers would know that interest up to Rs 1.50 lakh payable on one house and so also the 80C deduction of principal repayment up to Rs 1 lakh is taken into consideration for the purposes of determining the amount of TDS on the employee’s salary and the same appears in Form 16 provided by the employer.
But, what should be the treatment where the employee has purchased a second house on mortgage and is paying the EMIs thereon? Since the entire interest payable for the second house is tax deductible, shouldn’t it also be considered for purposes of TDS calculation?
Regrettably, the answer is in the negative. Circular No.11/2006 [F.No.275/192/2006-IT(B)] dated November 16, 2006 of the Central Board of Direct Taxes, dealing with deduction of tax at source from salaries, clearly indicates that benefit by way of lower TDS on account of interest deduction on housing loan is available only in respect of a single self-occupied residential house.
Consequently, no benefit by way of a lower tax deduction at source will be available to the employee in respect of his or her second house, irrespective of the amount of interest paid and irrespective of whether the property is given out on rent or not. However, note that this is only for arriving at the amount of salary TDS. The tax deduction, per se, is available as explained in the earlier part of the article and the assessee employee should claim the same through filing his or her tax return.