Amid rising interest rates, one can shift from pure debt funds to short-term debt funds

I have purchased an under-construction flat in Navi Mumbai but am yet to get possession. The registration was done in October 2013. I am currently staying in a rented accommodation in Navi Mumbai. I have following queries:

1) I am expected to get possession in June this year. Can I claim the principal and interest paid for these 4.5 years? My CA says it can’t be claimed.

2) Can I claim both HRA and interest on housing loan? Both the locations are in the same city.

3) Can anyone claim both the HRA & interest on housing loan benefits provided the rented income is received via bank and shown as income?
-Ravi Kokate

From the tenor of your questions, it appears that you will be renting out the flat whose possession you will receive in June 2018 and that you will continue to stay in the flat taken on rent by you. Based on these assumptions, the response is as follows:

For and up to the financial year ending March 31, 2018 - your CA is absolutely correct. You cannot claim a deduction either for interest payable on the home loan or for the principal portion of the home loan repaid to the lender. However, from next financial year, the entire interest payable up to March 31, 2018, will be aggregated and 20% will be allowed as a deduction for the next five years along with the interest payable for the respective years. The principal portion repaid till March 31, 2018, can never be claimed as a deduction.

There is no linkage between claiming exemption of HRA allowance paid to a salaried employee and deduction of interest payable on a home loan taken to acquire a property. The exemption of HRA is available to a salaried taxpayer up to the specified limits, provided the taxpayer actually stays in a rented premise and pays rent for it. It is not at all affected by ownership of property(ies) by the same taxpayer in the same or any other city.

I have invested in debt mutual funds - HDFC Banking & PSU Fund, BSL Dynamic bond fund, BSL MIP -II, ICICI Pru Monthly plan. The view is 3-5 years. My assessment is that gains of these funds have started lowering for the past two months. Please advise whether I should hold or not.

It is not clear when you made these investments but since all them are either debt funds or debt-oriented hybrid funds, they have been adversely affected by the terrific rise in interest rates which had led to a drop in net asset values. In the bond market when interest rates rise, the price of the bond falls and when interest rates fall, the price of the bonds increases. An extreme example will amplify the reasons for this phenomenon. Suppose you buy a bond for Rs 100 that will pay back Rs 110 at the end of the year, meaning that you expected a 10% interest rate. Now suppose due to an adverse market on the same day, the market interest rate expectations jumped to 20%. The price of your bond will drop to Rs 91.67 and 20% of Rs 91.67 is Rs 18.33. The price of Rs. 91.67 plus interest of Rs 18.33 becomes the maturity value of Rs 110. So if you sell the bond on the first day, it will now go for only Rs. 91.67. So if you sold at the market price on the first day you would have suffered a loss of Rs 8.33 on your investment of Rs 100 but if you held on till the end of the year you would have got the same return of 10% on your investment.

All the funds chosen by you have debt component which is reasonably long-term, and hence, even more affected by the sudden rise in interest rates over the last quarter. On the two debt-oriented hybrid funds you have (BSL MIP -II, ICICI Pru monthly income plan), the equity portion is primarily in -cap equity which should logically suit a conservative investor such as yourself. Their debt portion is affected by the interest rate rise just like the pure debt funds. You could possibly switch to equity savings funds such as ICICI Prudential equity income fund subject to exit load/capital gain tax considerations. The pure debt funds can be shifted to short-term debt funds such as Aditya Birla short-term fund or ICICI Pru flexible income fund to reduce the risks at this juncture.

CA Harsh Roongta is a fee-only investment adviser. Send your queries to personalfinance@dnaindia.net or tweet them to @harshroongta