Thursday, 20 March 2014

Residential Real Estate & Income Tax Deductions

It is that time of the year when you are in hurry to review all your investments and insurance to ensure you have availed all possible income-tax deductions. If you have missed any then you still have more than a week to make your financial decisions and avail them. Talking about income-tax deductions, here is a list of deductions/exemptions that an investor can use for her investments in real-estate.

Under Section 80(C): A tax-payer gets to deduct any repayment of housing loan done to the home loan service provider up to Rs.1 Lac for a self-occupied property.
Under Section 24 (a) & 24 (b): A tax payer u/s 24(a) gets a standard deduction of 30% of the net annual value towards repairs, calculated on the basis of rent received and fair market value of the property. A tax payer, u/s 24(b), gets a deduction towards interest paid up to Rs.1.5 Lacs on home-loan taken for a self-occupied property per FY. If you have a second house and if it is a let-out property, you can deduct the full interest (i.e. No Limit) from your rental income. You also get to claim deduction towards municipal taxes paid during the relevant FY. Furthermore, interest payable for the pre-construction period, i.e. prior to the year when possession was taken is deductible in five equal annual instalments commencing from the financial year in which the house was acquired or constructed.
The loss, if any, from the house property after considering the aforesaid deductions can be offset against income in any other head of the current FY. The loss, if any, which cannot be set off against the current FY’s income can be carried forward to subsequent FYs subject to a maximum of eight FYs for set off against the income from house property of subsequent FYs.
Under Section 54: Any long term capital gains arising on the transfer of a residential house (including self-occupied house) to an individual or HUF, is exempt from tax if the assesse has within a period of one year before or two years after the date of such transfer purchased, or within a period of three years constructed, a residential house.
For availing this exemption, the assesse must not transfer the new house within a period of three years from the date of its purchase or construction, as the case may be. Otherwise the exemption allowed under this section shall be reduced from the cost of the new house, in computing the capital gains arising therefrom.
Under Section 54EC: Any long term capital gain arising on the transfer of a residential house is exempt if the entire amount of such capital gain is invested in long-term specified asset i.e. bonds issued by National Highway Authority of India (NHAI) or by the Rural Electrification Corporation Ltd. (REC) within a period of six months from the date of transfer. However the amount of investment in long-term bonds by the assesse, during any financial year, shall not exceed Rs.50 Lacs.
If only a part of the capital gain is invested in the specified bonds the amount of capital gain exempt shall be equal to the amount invested in them. Such bonds shall be redeemable after three years.
Under Section 54F: If you make long term capital gains by selling other capital assets like shares, government bonds, land or gold then such gains are exempt if the entire net consideration is used to buy a residential house within a period of one year before or two years after the date of transfer. If, however, only a part of net consideration is so utilised the amount of exemption is calculated using a formula based on capital gains, net consideration and cost of new residential house.
If a tax-payer transfers the newly acquired residential house within a period of three years of its purchase or construction, then the amount of capital gains arising from the transfer of the original asset that was not charged to tax, shall become taxable as long term capital gains for the year in which the new asset is transferred.
Exemption from Wealth Tax: Any property which is given out on rent for a minimum period of 300 days in the previous year is not considered as an asset as per wealth tax provisions. Such a property i.e. let out for 300 or more days, is excluded from net wealth and not subject to wealth tax as per the prescribed provisions of the wealth tax law. Also any house occupied by the assesse for the purpose of his business or profession is excluded from net wealth and not subject to wealth tax.
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