Make the most of your house property

Computation of house property income and the related tax incidence is a little complicated, perhaps on account of the fact that this is the only income that the Income Tax Act (ITA) taxes on a notional basis.

In other words, tax on property is levied on the inherent capacity of the property to earn income. It is not necessary that income is actually earned, rather, the tax is levied more on the inherent potential of the house property to generate income.

First up, a single self-occupied property is not chargeable to tax. Now, if the taxpayer has more than one self-occupied house, the annual value of any one house, at his option, can be taken as nil. The others will be assumed to have been rented out and taxed on a notional annual value. The option chosen by the taxpayer can change from year to year.

From the annual value of the property as determined above, any municipal taxes levied by the local authority can be deducted. The value arrived at by deducting the municipal tax is referred to as net annual value. From such net annual value, deductions under Section 24 as detailed below are allowed and the balance finally is the taxable income under ‘Income from House Property’.

Section 24 basically offers two deductions. First is a statutory deduction of 30% of the net annual value. This is similar to the standard deduction that was available on salary income.
The second deduction is to do with the interest payable on property bought on mortgage. Interest up to Rs1.5 lakh per annum is tax deductible. Moreover, the capital repayments are eligible for Section 80C deduction up to Rs1 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 `1.5 lakh is applicable only to the first property. From the second property onwards, the entire interest is deductible. Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits for someone who wants to buy property outright without taking a loan.

Extract maximum tax benefit
A property can be co-owned and each co-owner is eligible for the tax benefits. However, there are points to be kept in mind to extract maximum tax benefit. All co-owners should be joint applicants for the loan. This is very important from the point of view of tax benefits.

Take the case of husband-wife. While buying the property both should have a specified share. Also, the loan should be taken in the same proportion and interest and principal payments for the same should be made separately by each.

If this strategy is followed, each is individually entitled to an interest deduction of up to Rs1.50 lakh under Section 24 and a principal deduction of up to `1 lakh under Section 80C. So totally between the two, up to Rs5 lakh of income will escape tax!

Putting it differently, for availing of the tax breaks, the asset has to belong to the person and so also the loan. Possibly being unaware of this principle, often taxpayers make their property purchases in anomalous ways. The house may be purchased in the wife’s name, but it is being financed by a joint loan with EMIs being paid by husband and wife. This can be possible as the purchase agreement with the builder is distinct from the agreement with the housing finance firm. 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.

Take care of one additional trap. A co-applicant of a loan is not the person who is responsible for paying the installments of EMI. He is there only in case of default by the main borrower.  Also, the co-applicant has no right to continue to stay in the property if the finance company decides to take over the property.

Therefore, it is best to co-own the house in specified  shares and take a joint loan. Though not strictly necessary, it would be convenient to have separate loan accounts with one party being co-applicant. This way each one is entitled to a maximum of `1.50 lakh on interest payments and Rs1 lakh on principal payments, making it a total of Rs5 lakh

Salary TDS and second house property
While on the subject, the following is a brief discussion on the TDS treatment from salary in the case of an employee who has purchased a second house property. Readers would know that interest up to `1.50 lakh payable on one house and so also the 80C deduction of principal repayment up to `1 lakh is taken into consideration for the purposes of determining the TDS amount and the same appears in Form 16 provided by the employer. The question is what should be the treatment where the employee has purchased a second house on mortgage and is paying 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 by the employer?

Regrettably, the answer is not very clear. Circular No. 8/2010 [F. No. 275/192/2009- IT(B)], dated 13-12-2010 13th December, 2010 of the Central Board of Direct Taxes (CBDT) dealing with deduction of tax at source from salaries while clearly indicating that interest deduction on housing loan in respect of a self-occupied residential house will be considered in arriving at the TDS on salary, is silent on the issue of the treatment where there is a second property (or the first property itself is rented out), thereby making the entire interest deductible without any limit.
This silence on the part of the circular has resulted in some employers allowing the benefit of the additional interest, while others expressly disallowing the same i.e. limiting the adjustment to only the interest in respect of a self-occupied residential house.

 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 tax returns.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com