Tax planning and managing the House Property

By | October 20, 2014

The new Government unveiled the Union Budget 2014 with a pragmatic recognition of common man woes and a thrust towards structural reforms. In the recent past, the Indian economy has faced one of its most challenging periods of growth and stability with subdued growth rate, high rate of inflation and lower rate of capital formation. There has been an increased proportion of spending on consumption resulting in lower savings. The Budget 2014 was expected to address their concerns and provide relief, subsequent to which the announcement of proposals by the Finance Minister (FM) lived upto the expectations.
The direct tax proposals of budget 2014 have been tax friendly. It is also worth noting that budget proposals have received the assent of President and now it is law of land under Indian Income Tax Act. It provides for tax advantage in the form of increased basic exemption limit for individuals by Rs.50K.
Further Interest and principal repayment deduction upto Rs. 100,000
However, for individuals, apart from the increase in exemption limit, the basic necessity of housing for a common was considered, the area which has remained dry for over a decade in almost all the budgets. With high interest rates and tight liquidity, it was high time to revise the limit of deductions. Under the earlier Tax regime, deduction of Interest on housing loan for self-occupied property was restricted to Rs. 1.5 lakh per annum which has now been revised to Rs. 2 lakhs. Higher deduction will also be allowed under section 80C for principal repaid on such housing loan, the limit for which has now been increased to 1.5 lakh per annum from earlier Rs. 1 lakh. Therefore, buying a house property with borrowed funds looks a good decision providing additional tax benefits.
Further, in Case where a person has more than one house property, borrowed funds can help save tax as there is no cap on deduction of interest on property other than self-occupied. Moreover, benefit under section 80C can be availed on repayment of loan.
Under Wealth tax Act, more than one house property owned by taxpayer is taxable. In this case, the amount of borrowing helps in reducing one’s wealth tax liability, as borrowed funds outstanding on valuation date would amount to debt payable by taxpayer which would reduce net taxable wealth of the assessee.
To explain above, let us go through a Practical Case Study:
Mr. X is considering to buy one residential House worth 40 Lakhs. He has one self occupied house of Rs. 1 Crore . Housing loan is available at the rate of 12%. Mr. X has enough funds not to borrow and buy house property with his savings. NAV of new house as per Income tax is 4 lakhs. Other taxable income of Mr. X is 10 lakhs and other taxable wealth is 40 lakhs. How can he manage the properties to save taxes reduce tax liability.
Solution:
As one property is exempt as self – occupied property, house worth 1 crore will be exempt. Moreover, one has to plan FD in such a way that the lock – in period equals to period after which installment becomes due. Hence, there should be different lock in period to avail maturity of FD in such a way that it can directly pay amount of Installment as and when due.
Analysis to buy with own funds and with borrowed funds is as under:
Statement of Income Tax liability for AY 2015-16
Particulars Own funds –
from savings
Borrowed Funds – Housing Loan
Income from Self occupied property 0 0
NAV of Deemed let out property – new hosue (Retrun@ 10% on 40,00,000) 400,000 400,000
Deduction of Interest for above Nil 480,000
30% standard deduction 120,000 120,000
Income from House property (A) 280,000 -200,000
Other taxable Income (B) 10,00,000 10,00,000
Interest on FD (C) Nil 360,000
80C deduction of Housing Loan repayment (D) Nil 150,000
Total Taxable Income (A+B+C-D) 12,80,000 10,10,000
Tax theron 215,270 131,840
 Statement of Wealth Tax Liabilty as on valuation date
Particulars Own funds –
from savings
Borrowed Funds – Housing Loan
Self-occupied House (A) Nil Nil
New House (Same value as purchased on Valuation date) (B) 40,00,000 40,00,000
Other Taxable Wealth(C) 40,00,000 40,00,000
Debt (D) Nil -40,00,000
Taxable Wealth(A+B+C-D) 80,00,000 40,00,000
Wealth Tax 50,000 10,000
 Statement of Tax Savings
Particulars Own funds –
from Savings
Borrowed Funds – Housing Loan
Income Tax (A) 215,270 131,840
Wealth Tax (B) 50,000 10,000
Total Taxes (A+B) 265,270 141,840
Taxes Saved (265,270-141,840) 123,840
Tax saved as a Percentage of tax payable with own funds   47%
 Form above example, an effective and simple tax planning has reduced the taxes to almost half of what could have been payable without that. The above percentage differs from case to case but it is sure to put some more money out of taxes and into your pocket. To add upto it, all these can be effectively executed within the four boundaries of Direct tax law.
 Disclaimer
The Contents of this article are views expressed by author in its personal capacity and to the best of his knowledge of author. These views are based on the existing provisions of direct tax law and its interpretation, which are subject to change from time to time. I do not assume any responsibility to update the views consequent to such changes. Moreover, the article does not provide any assurance that the revenue authorities/courts will concur with the views expressed herein.

Leave a Reply

Your email address will not be published. Required fields are marked *