Rental Housing — The
Modern Mantra For Investment Planning And Tax Saving
During the last three years the investment scenario in the country has seen a down-trend with regard to interest rates. Thus, interest incomes whether from bank or public deposit and even from postal schemes as well as the relief bonds have all seen a downward trend. In this situation it is now time that the investor should shift his focus of investment planning to real estate.
It is now recommended that the investment
in real estate should find a favorable place in the hearts of the investors,
especially in view of the falling interest rates as also the subdued stock
market. In the changed scenario it is high time that almost all investors, and
more particularly high net-worth investors, shifted their investment pattern
from movable assets to immovable assets in the form of commercial building or
residential building. While planning your rental housing income do not forget
to take into consideration of service tax as per Finance Act 2007 (as amended
by the Finance Act, 2008) on commercial use of property.
An investment in real estate, especially for the purpose of renting out such real estate, has manifold advantages. Firstly, an investment in real estate will typically result in appreciation of the real estate asset over the years. Secondly, rental income derived from investment in real estate will be subjected to income tax at a lower rate of tax
This is because several deductions are
available in respect of income from house property. The first most important
deduction permissible is in respect of house tax payment for the property which
has been given on rent. In such cases, the entire house tax payment is allowed
as a deduction from the rental income of the tax payer, provided the actual
payment of house tax is made by the assessee. In a situation where the assessee
does not make payment of house tax, then the deduction for house tax payment
would not be allowed. It, therefore, implies that in case house tax bill is
received by the owner of the house property and he does not deposit the said
bill but files an appeal to the concerned authority raising objection to the
house tax bill, in such circumstances no deduction in respect of house tax bill
would be permissible from the rental income so derived by him.
- After deducting the payment of actual House
Tax paid from the gross amount of rent, the resultant figure is known as Annual
Value.
- From this annual value, a standard deduction
is available equal to 30% of the annual value to the tax payer for various
expenses like, repairs, collection charges, etc. This special 30% deduction
from the gross rental income brings down the marginal income tax rate to just
21% only plus surcharge thereon in respect of rental income from house
property.
Thus, for all individuals and Hindu
Undivided Families who are required to make income tax payment @ 3O% (on income
in excess of `
5,00,000
p.a.) the effective rate of income-tax payable by a person for rental income
would be only 21% (maximum marginal rate less 30% standard deduction from
rental income = 21%).
Thus, rental housing happens to be the
modern mantra for investment planning and tax saving. With the initial
exemption limit becoming higher, the investment in house property to receive
rental income would be a preferred investment.
Thirdly, interest on loan is allowed as a deduction while computing the rental income of the assessee. The rate of interest is immaterial. However, what is important is that the loan should have been taken and utilised for the house property from which such rental income is derived. Thus, whatever quantum of rent is paid by a person either to a bank, to a financial institution, or to a relative or
to any other person from whom such loan is
taken, the entire interest on loan will get deducted while calculating the
assessee’s taxable income from “house property.”
No separate deduction these days is permissible in respect of insurance premium paid for the house property. Finally only such rent from house property is subjected to tax which is actually received by a person. Thus, investment in house property for generating rental income is a worthwhile proposition from a tax payer’s point of view.