Owning a home is possibly the most significant financial move you will make in your life. If you have taken a home loan, you should not let the brunt of EMIs dim your spirits. Sometimes, selling a capital asset can lead to large gains too, which may be worrisome. But consider the bright side; both these come with tax benefits. Here are some smart ways to lower your tax outgo-
Timing the sale of your under construction property – A right to own a property is also a capital asset. Therefore, any gains on sale of an under construction property are taxed as capital gains. If the right to the property has been owned for under 3 years, the gains are taxed as short term capital gains which are taxable at slab rates applicable to your total income. If held for 3 years or more, these gains shall be long term and taxed at 20%. A right to property ownership gets converted to a house property when the construction is completed and possession is obtained. Once that happens, the ownership period is calculated from the date of possession. If you do not intend to hold this property for a longer duration (3 years or more), it helps to sell it while possession has not been taken and it’s still under construction. This way you can significantly lower your tax outgo on the gains.
Double your tax benefits with joint ownership – The interest paid on a home loan is an eligible deduction from your taxable income. For a property which is self-occupied or vacant, the deduction is limited to Rs 2lakhs. This tax benefit is available to each of the co-owners who are also co-borrowers. If there are two owners who are also borrowers in the loan, and are paying the EMI, both are eligible to claim deduction up to Rs 2 lakhs for interest portion of the EMI. This lets the household claim a higher deduction on interest paid; Rs 4lakhs in aggregate for a self-occupied property. So joint ownership can bring higher tax benefits.
Each joint owners can claim principal repayment under 80C – Paying EMIs can put a burden on your pocket leaving you with fewer funds to make investment for saving tax. The best thing to do at this time is to claim 80C deduction on principal component of your EMI. In case of joint owners, each of you can claim Section 80C deduction of up to Rs 1.5lakhs by claiming principal repaid. This will significantly reduce your tax outgo, without impacting your cash flow.
There’s more to claim – If you have recently registered your house property, don’t forget to claim stamp duty and registration charges under section 80C. These are allowed to be claimed in the year they are paid. Joint owners can split the cost such that both maximise 80C in the first year when there’s hardly any pay out towards principal.
Use your choice – If you are owner of more than one house property which are self-occupied or vacant, one of these is assumed to be rented out and tax must be paid on the notional rent. Now which property you assume as let out has been entirely left to your choice. A little birdie tells us, it makes sense to plan your property ownership such that a loaned property is assumed to be let out, so higher tax benefits can be claimed.
Claim pre-construction interest – Tax benefits on home loan interest can be claimed starting the financial year in which construction is complete. Any interest which belongs to the financial year prior to this year is called pre-construction interest. It can be claimed in 5 equal yearly instalments once construction is complete. However, the total interest deduction in a financial year cannot exceed Rs 2lakhs for a self-occupied property. There is no limit on interest deduction for a rented property.
This article by ClearTax was published on Deccan Chronicle on 18th July 2016.