A second house can reduce your tax burden

In 2005, Mitul Vora, a marketing executive with an auto company, took a Rs 8 lakh loan for 15 years to buy a house in Gandhidham, Gujarat. Currently, he is paying an EMI of Rs 8,700. However, a year later, Vora switched jobs and shifted to Ahmedabad.

Instead of renting a place, he bought another house, again through a home loan of Rs 20 lakh for 20 years, for which the EMI is about Rs 20,650. "I could have sold the house at Gandhidham to fund the second purchase, but didn't do so because I'm sure the value of the property will appreciate in a couple of years," says 43-year-old Vora. Instead, he has leased the first house at an annual rent of Rs 84,000.

However, the high interest rates are making it difficult to service both the home loans. "I come under the highest tax bracket and have to pay 30% tax on my income, which makes it difficult to save enough to pay both the EMIs," he adds. What Vora doesn't know is that he can reduce his tax liability if he avails of the deduction on home loans, especially in case of the second house.

Exemption on interest

In case of a home loan taken for a self-occupied property, the principal amount repaid up to Rs 1 lakh qualifies for deduction under Section 80C, while up to Rs 1.5 lakh of interest paid is taxdeductible under Section 24.

However, in case of a home loan for the second property, only interest payment is eligible for deduction. No tax benefit is available on the principal repayment on the second loan. However, the good part is that there is no limit on the deduction for interest payment on the second loan (see Benefit of buying a second house). This is because the second house has been given out on rent, explains Adhil Shetty, chief operating officer of Bankbazaar.com.

According to Homi Mistry, partner, Deloitte Haskins & Sells, a property owner can avail of tax benefits on the interest paid on multiple home loans. "Whether the second house is purchased purely as an investment option or as a weekend getaway, the interest paid on a loan taken to buy it is tax-deductible. Since the interest payment is a large expense, you can add significantly to your disposable income if you can save on it," says Mistry.

In case the house is yet to be constructed, 20% of the total interest paid during the preconstruction period is also allowed as tax deduction. This is available for five years from the time the construction is complete till you get possession.

Deductions allowed on income from second home

Even if the second house is lying vacant, the Income Tax Department will consider that it has a rental value. The notional or deemed income (see How income is computed) will be added to your taxable income.

Sonu Iyer, tax partner, Ernst & Young, says, "A buyer can deduct expenses, such as municipal or property taxes actually paid, from the deemed income. Other than this, 30% of the net annual value, which is the difference between the rental income and municipal taxes, is also allowed as deduction. In case the house is rented out, 30% of the actual rent can be deducted from the taxable income, apart from deductions for local and municipal taxes."

After deducting such expenses from the income that you earn from the property, if you incur a loss, you have the option to set it off as follows:

. The current year's loss will first be set off against any other income from property.

. It can also be set off against other incomes, such as that from salary, business or profession and capital gains, earned in the current year.

. If your balance continues to be in the red, you can carry forward the loss for up to eight years. However, the amount that is carried forward is only allowed to be set off against the income that is earned from a house.

How to save on taxes

If you own several houses, you can choose one as your primary residence. The income from this property will be treated as nil and exempt from tax, even if you have actually rented it out. It is for this house that the limit of Rs 1.5 lakh applies for deduction on loan interest.

The entire interest on the loan taken for the other house, the income from which is taxable, can be deducted from your income. This applies to any number of nonexempt houses that you may own.

So, to maximise your savings, consider the house with the highest loan as the non-exempt one. However, make sure that the interest payment on this loan is higher than the principal-cum-interest payment on the other loan.



Additionally, if you give your second house on rent for more than 300 days in a year, it will not be subject to wealth tax, which is levied at the rate of 1% on wealth that is in excess of Rs 30 lakh.

 

 

If any of the houses is sold after three years, the profit will be taxable as long-term capital gains. However, there are beneficial provisions under which this gain is exempt from tax. So if you invest the money to construct a house within three years or buy another house within two years, your income will be tax-exempt.

However, the exemption is reversed and the amount taxed as capital gain if the new property is sold within three years of being constructed/purchased.

This will be considered a short-term gain and taxed according to your slab rates. You can also save tax if you invest the profit in a special bank account under the capital gain account scheme. A similar exemption is available for investments of up to Rs 50 lakh in bonds, which are redeemable after three years. This investment should be made within six months of the sale.

 

Article from one of the leading news paper

Akshaya Tritiya: Does it make sense investing in gold? -From News paper

Reserve Bank of India governor D Subbarao has gone all out to discourage gold investments as record imports of the yellow metal are adding pressure to the rupee.

Diehard equity fans criticize the absence of any intrinsic value in gold and its susceptibility to theft is a constant worry for its owners. After providing 25% annualized returns over the past five years, gold has depreciated 4% in recent months. Given this background does it make sense investing in gold?

According to experts, the answer is yes, but only by way of insurance against other asset classes falling apart. "It is our opinion that the recalcitrant inflation and moderate performance in equity and debt asset classes may prompt many retail investors towards gold as an asset class," says Lakshmi Iyer, head of product and fixed income, Kotak Mutual Fund.

She adds that the latent volatility in the forex market, and the possible monetary expansion in the primary currencies worldwide, may also boost the gold performance prospects. But it is a bad idea if you believe that gold can be an alternative to other assets such as equities and fixed income.

"As long as you are not looking for short-term gains, we have always held the view that investment in gold should be part of a well diversified portfolio," says Kapil Narang, chief operating officer Ameriprise India. He adds that gold is seen as a hedge retaining value at times when other asset classes go through volatility.

The record 30% rise in gold prices over the last year is precisely the reason why financial planners are recommending that investors do not make any big bets on the yellow metal.

"We have gone past that stage when gold could be recommended as a tactical investment. Now we would typically advise an investor to have 5% gold in their portfolio purely as a hedge against inflation as price of the metal moves in line with inflation," says Aditya Apte, partner at The Tipping Point, a financial advisory firm.

He adds that for those who have already chosen to have an asset allocation of say 10% of their portfolio in gold and now with the increase in prices the share of gold has gone up to 15%, they could look at selling some gold and increasing the share of those assets whose value has shrunk.

While this makes a case for continuing to invest in gold, the bad news for women is that they cannot look to buying gold jewellery and treating that as an investment. "The "making charges" in gold jewellery and the deductions during resale do not leave much scope for buying jewellery as investments," says Apte.

He adds that even if one were accumulating gold for a future requirement like marriage, it would make sense to buy the metal in electronic form through exchange traded funds, a form of dematerialized gold. "Even if gold were purchased in bullion form there is still a margin between the sale and repurchase price. The best option is to invest in ETFs and upon requirement the ETFs can be sold and the proceeds used to buy physical gold."

 

ETF as an investment has caught on very well with the number of accounts rising to 4,28,769 in September 2011 from 1,47,047 in March 2010, indicating a growth of almost 192%. Total amount of gold held by ETF AMC has gone up from 19 tonnes in March 2011 to 28 tonnes in September and 33 tonnes in December 2011, an increase of 74% in nine months.

Seeing the popularity of the gold ETF, the National Stock Exchange (NSE) has decided to have an extended trading session for gold exchange traded funds, after trading concludes in the cash and derivative segments at 3.30 pm, on Akshaya Tritiya April 24 (Tuesday).

While trading can be done on gold ETFs in the normal market hours from 9.15 am to 3.30 pm, trading in gold ETFs will resume at 4.30 pm on April 24 and will continue till 8 pm, to give an opportunity to investors to invest in the yellow metal till late in the evening. There will be no transaction charges for trading in gold ETFs on Tuesday.