Should you rent a house and pay EMI at the same time?
Some Budget 2017 proposals are likely to narrow the scope for home ownersUpdated: Mar 04, 2017 13:43 IST
Apna Ghar is a dream that every common man often carries. However, with the ever rising real estate prices coupled with the steep inflation rates, the common man is often made to think twice before he hits the go ahead button to invest.
The housing loan mechanism works as a big boost for the ever thinking common man on whether to invest or not. Once the decision is made and the house is still in the construction stage such people may continue to stay in a rented accommodation and avail the benefit of house rent allowance, if the employer offers the same to them. It is noteworthy that in such a scenario the various tax breaks that the income tax law has to offer as regards the EMI’s can also be availed by such people.
Once a homebuyer has finally decided to purchase property, he is likely to continue to stay in a rented accommodation until the project he has invested in is constructed and avail the benefit of house rent allowance. In such a scenario the tax breaks offered by the income tax law as regards EMIs can also be availed by him.
There may also be situations wherein a person can also avail the benefit of house rent allowance while he owns a house for which equated monthly installments are being paid and rent is earned by virtue of the house being rented out. This primarily happens in situations wherein the distance between the owned accommodation and the place of employment is generally not close.
Whilst we may have a genuine situation as emphasised above, people who resort to unscrupulous means could end up having the taxman knocking on their door for sure unless the situation is explainable with true and authenticated facts.
Talking of the benefits offered by the income tax laws, relevant exemption pertaining to house rent allowance is available subject to compliance with the prescribed conditions. Also, deductions are available for repayments made on account of the housing loan (ie, principal and interest payment). While the deduction for principal repayment is allowed from gross total income, the interest payment is deductible under the head Income from House Property, while arriving at the overall gross total income. Such interest deductions are capped at `2 lakh for a self-occupied property with no limit for a rented property.
However, the recent Finance Bill, 2017, has proposed a cap on set off of loss from house property with any other income up to Rs 2 lakh. Balance unabsorbed loss (if any) needs to be carried forward for adjustments in future years. This proposal may have a substantial impact on the overall set off and carry forward with regard to the interest income wherein a portion of such interest may just go waste after eight years.
Another important aspect that needs to be borne in mind is that the deductions for loan repayment are allowed only after the possession/completion of the property which means that repayment of principal amount at the pre-construction stage is a dead loss. This principle, however, doesn’t apply to the interest paid during the pre-construction period since the same gets allowed as a deduction, post the possession of the property, in five equal installments.
In a nutshell, simultaneous claiming of deductions for both rent and EMI payments in purely genuine cases comes with tax benefits to the taxpayer. Although, the proposed set and carry forward amendment may narrow the scope by a bit.
The author is director with Deloitte Haskins and Sells LLP. With inputs from Shailly Jain, senior manager and Kriti Gandhi, deputy manager with Deloitte Haskins and Sells LLP