Global Business

Home loan helps bring rental income to a non-tax level

H. P. Ranina/ NRI Problems/Dubai
Filed on September 20, 2020

Certain eligible borrowers can claim upto Rs5 lakhs as a deduction from their rental income.

Q: I am planning to buy a property in India. I have surplus funds based on my past savings.  However, I have been advised that it may be preferable to take a loan to finance the cost of the new house and to use my saved funds for making profitable investments.  I want to know in what way it is beneficial to take a loan.  I intend to let out the house as I am in the Gulf and I will not need it for my personal residence for the next few years.

A: A home loan affords you several incentives which may virtually bring your rental income to a non-tax level. Therefore, though you can buy a house using your own past savings, the home loan facility may shield your rental income from tax liability and your personal funds can be used for investing in certain tax-free bonds or securities. Certain eligible borrowers can claim upto Rs5 lakhs as a deduction from their rental income. Apart from municipal taxes which are deductible, 30 per cent of the rent received (less taxes paid) is allowable as a standard deduction from the rent taxable under the head 'Income from House Property'.

In addition, where the house is bought by taking a loan, you can claim a deduction of upto Rs1.5 lakhs under section 80-C of the Income-tax Act in respect of the principal amount of loan installment which is paid annually. Further, under section 24, an amount of Rs2 lakhs paid by way of interest is deductible from your net rental income. In case the stamp duty value of the residential property which you buy does not exceed Rs4.5 million, you will get a further deduction in respect of interest of Rs150,000 if the house is purchased by March 31, 2021. It is, therefore, quite possible that you may not have to pay any tax at all on the rental income which you will earn. Your own savings which are now free for investment may fetch you a return which may be within the initial tax exemption limit of Rs250,000.

Q: My daughter who has now got a job in India wants to take a loan for buying a house.  I have also advised her to take out immediately a life insurance policy.  She told me that loans are available at a cheaper rate of interest for women and for insurance policies also the premium payable by women is lower. I am quite confused as to why it should be so.  Is this true?

A: There are some lenders, including banks and financial institutions, who charge a lower rate on home loans, car loans and education loans to women borrowers.  The main reason is that lenders consider women to be more particular in repaying the amount and, therefore, they are a lower credit risk. Public sector banks like the State Bank of India and Canara Bank offer concessional rates of interest to women borrowers for home loans and education loans respectively.

As far as insurance products are concerned, they assess the risks differently for men and women. Insurance companies take into account the morbidity risk, mortality risk and risk of accidents. For men, these risks are perceived to be higher than for women. This is generally because the life expectancy figure is higher for women.  According to latest statistics, women tend to live longer than men. Hence, the life insurance premia is lower for women than men. However, for medical insurance, the premia are generally the same for both men and women; some companies even charge a higher premium for women as they factor in certain critical illnesses which are prevalent among women.

Q: I have a distant cousin in India who wants to gift to me her property which is a residential house. Can she do so within her lifetime or is it advisable to receive it after she passes away? What would be the tax implications if the property is gifted to me during her lifetime or it is bequeathed to me by her Will? I have been a non-resident Indian for several years and will continue to remain so in the distant future.

 A: As a Non-Resident Indian you are eligible to receive property by way of a gift.  However, if the person is not related to you, the value of the asset gifted would be treated as income taxable under the head 'Income from Other Sources'. Therefore, you will have to pay tax at the normal rates applicable to individuals on the value of the property which will be the stamp duty value which is deemed to be your income.  Such amount may be quite large as the maximum marginal tax rate of 30 per cent would be applicable on such taxable amount in excess of Rs.1.5 million.

If the stamp duty value of the property is more than Rs5 million, surcharge would also be payable on the tax at the rate of 10 per cent. If the stamp duty value is between Rs10 million and Rs20 million, the rate of surcharge on the tax is 15 per cent; where the value is between Rs20 million and Rs50 million, the surcharge on the tax is at the rate of 25 per cent, and where the value is more than Rs50 million, the surcharge on the tax would be at the rate of 37 per cent. Further, on the aggregate of the tax and surcharge, an education cess of 4 per cent is payable. On the other hand, if you receive the property by way of inheritance under a will made by your cousin, there would be no tax implications whatsoever.

H. P. Ranina is a practicing lawyer, specialising in tax and exchange management laws of India.

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