Buying residential property, for many is a decision of a lifetime. No wonder it is also a decision that requires careful planning. It is a given that most of us would scout a residential property based on the location, budget, and amenities. However, tax planning is an equally important factor that cannot be given a miss. Therefore, it is imperative to develop an understanding on tax benefits, deductions, and liabilities to make informed decisions and save money in the long run.
Why Tax Planning Matters in Buying Residential Property
Many homebuyers have their focus on the property’s price and the loan amount taken. However, they tend to overlook tax implications. Proper tax planning is an effective way to reduce the additional financial burden while also ensuring compliance with legal requirements. Buyers must bring to their knowledge the available tax benefits and deductions that can help lower overall costs.
Tax Benefits on Home Loans
A major tax benefit on buying residential property is that of deduction on home loan repayments. Under various sections of the Income Tax Act, the government has provides tax relief to homebuyers:
Deduction on Principal Repayment (Section 80C)
- Homebuyers can claim a deduction of up to Rs. 1.5 lakh per year on the principal repayment of a home loan.
- This benefit applies only to properties that are not sold within five years of purchase.
Deduction on Interest Payment (Section 24b)
- A deduction of up to Rs. 2 lakh per year is allowed on the interest paid on home loans for self-occupied properties.
- For rented properties, the entire interest amount can be claimed as a deduction without any upper limit.
Additional Deduction for First-Time Buyers (Section 80EEA)
- First-time homebuyers can claim an additional deduction of up to Rs. 1.5 lakh on interest payments if the property value is below Rs. 45 lakh.
- This deduction is available only if the loan is taken from a recognized financial institution.
Stamp Duty and Registration Charges
When buying residential property, buyers must also pay stamp duty and registration charges. These costs vary by state but can be claimed as a deduction under Section 80C. The maximum deduction limit is Rs. 1.5 lakh, but it is applicable only in the year of purchase.
Capital Gains Tax Considerations
If a property is sold, the seller may have to pay capital gains tax depending on the holding period:
Short-Term Capital Gains (STCG):
- If the property is sold within two years of purchase, the gains are taxed as per the individual’s income tax slab.
Long-Term Capital Gains (LTCG):
- If the property is held for more than two years, the gains are taxed at 20% with indexation benefits.
- LTCG can be reduced by reinvesting the gains in another residential property (under Section 54) or investing in specified bonds (under Section 54EC).
Tax Benefits for Joint Owners
In case of a joint purchase of a property, both owners can claim tax benefits on an individual basis. This way, the deductions can be maximized; more so for home loan repayments. The applicable conditions for the same are:
- The property must be registered in both names.
- Both owners should contribute to loan repayment.
- Each co-owner can claim deductions under Sections 80C and 24b separately.
Rental Income and Tax Implications
If the purchased property is rented out, the rental income is considered taxable. However, homeowners can claim deductions on expenses related to property maintenance, home loan interest, and municipal taxes. Proper tax planning can ensure that homeowners make the most of these deductions.
Government Schemes and Benefits
The government promotes homeownership through various schemes that provide tax relief and financial assistance:
- Pradhan Mantri Awas Yojana (PMAY):Offers subsidies on home loans for first-time buyers.
- Affordable Housing Benefits:Reduced GST rates and additional deductions for affordable housing projects.
Conclusion
Tax planning is an important aspect for buying residential property. Understanding the tax benefits, deductions, and liabilities is an effective way to make financially sound decisions. Add to that, as buyers, one can also leverage the benefits of home loan deductions, stamp duty benefits, and capital gains exemptions that reduce the tax burden significantly.