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Last Updated : Jan 11, 2013 04:21 PM IST | Source: CNBC-TV18

Find out why residential property is more profitable

In CNBC-TV18's personal finance segment today, Pankaj Mathpal of Optima Money Managers highlights the tax and income benefits on a residential property. Mathpal believes that a self-occupied house gives lesser tax deductions than a rented house.


In CNBC-TV18's personal finance segment today, Pankaj Mathpal of Optima Money Managers highlights the tax and income benefits on a residential property. Mathpal believes that a self-occupied house gives lesser tax deductions than a rented house. "For self-occupied house you cannot claim deduction on municipal taxes, but for let-out property you can claim deduction for the municipal taxes also on your income from house property," he adds.


Below is an edited transcript of Pankaj Mathpal's interview on CNBC-TV18


Q: What are all the benefits like capital appreciation, rental income and tax benefits you get when you take a loan for a residential house? Just tell us all benefits available from a tax standpoint?


A: When you invest in a house property, in a residential property, it is not only the capital appreciation that you will get on your house, but also the cash flow in terms of rental income plus tax benefit. So when you calculate returns from your house property you should calculate the combined returns.


While buying a house you have to pay stamp duty and registration charges. You can claim deduction on these expenses under Section 80C of income tax in the respective year. When you pay equated monthly installments (EMI) on loan there are two components - principal and interest. You can claim deduction towards the principal payment under Section 80C and for interest payment you can claim deduction under Section 24B of income tax act.


When there is a self-occupied property there is limit for claiming deduction towards interest that is Rs 1,50,000, but when you give your house on rent there is no limit. So total interest paid during that financial year can be claimed under Section 24B and this loss can also be set-off against your income from house property, your income from salary or business income. So that is also indirect income to you.


Also Read: 10 things to know about home insurance


During construction period when you pay interest on borrowed capital, you cannot claim deduction during that period. But from the year in which your construction is completed, you can claim deduction for the interest paid during pre-construction period spread over five years. So that benefit is also available to you. Also municipal taxes, what you pay on your house when house is given on rent.


For self-occupied house you cannot claim deduction on municipal taxes, but for let-out property you can claim deduction for the municipal taxes also on your income from house property. When you sell your house after holding it for minimum three years, you also apply inflation index which means you do not pay tax on the net profit, but you pay tax only on the capital appreciation, in that case also your tax liability is less. So there are multiple benefits. When you are calculating returns on your house property these are combined benefits.

Q: If someone were rich enough to buy a readymade house he gets a tax waiver on the principal if he does it on loan. Does he gets tax waiver on the interest as well as he does not have to pay tax on the rent he gets from letting out that house?


A: I did not say this. Definitely rent is income. So whatever rent he receives, 30 percent he can claim as a standard deduction, 70 percent is income and from that income whatever rent he has received, he will separate that interest paid, so full interest.


Suppose total interest paid during the year is Rs 3 lakh and rent received is Rs 2 lakh, so first thing he is considering only 70 percent of Rs 2 lakh and also he will setoff that interest paid. That income will be only the income, it will be loss. There is no income, because it was only Rs 2 lakh that was received towards rent and from that he is considering only 70 percent or I also told you like the interest of Rs 3 lakh. So where there is profit there is a loss and that loss can be setoff.


Q: Investor has an existing car loan for which he still have to repay about Rs 2 lakh till the end of 2013. He recently got married and his wife also works. His wife’s salary is sufficient to support the EMI of the car loan. Investor wants to know if he can transfer the car loan to his wife’s name as he want to now take a home loan in his name and is worried that his loan application might be rejected because of his existing car loan. What do you think is the best way out?


A: The car is in his name, without transferring the car he cannot transfer the loan in his wife's name. So if he wants to transfer the loan, first he will have to transfer the car. So he will have to pay extra cost for this. I will not advise him to transfer the car in his wife’s name and then transfer the loan instead when he wants to apply for home loan he can apply jointly with his wife. So his eligibility will be considered on the combined income of his and his wife.



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First Published on Jan 11, 2013 02:43 pm
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