Investment in a house could be the best way to save tax. As prices of residential units have gone up in the range of Rs 50 lakh and over, tax experts say buying a second house for investment purpose will save even more tax than that over the first house you bought for personal use.

When you buy a house for personal use, you can take the deduction from your taxable income against the interest payment on your loan taken to buy the house up to Rs 1,50,000 only.

Besides this, you can also avail the benefit of deduction against the repayment of principal amount under section 80C.

However, under 80C, you can avail the deduction up to Rs 1,00,000 - but this is inclusive of all the investments like your contribution in EPF, PPF, tax savings mutual funds and school fees of your children among other things.

Investing in housing is safe and brings in better returns

Therefore, normally, if your taxable income is more than Rs 5 lakh, most of the limit provided under section 80C is exhausted because of the compulsory savings scheme.

Still, if you take repayment up to Rs 20,000 against principal under section 80C, your net tax savings every year will be Rs 52,350. This is mainly because the benefit against interest payment is capped at Rs 1,50,000 even if you have taken a loan of Rs 50 lakh to buy a house at 8%, and your interest outgo in the first year will be Rs 3,96,181.

The monthly installment on Rs 50 lakh loan at 8% for 20 years will be Rs 41,822.

This works out to an annual payment of Rs 5,01,864. Out of this, Rs 3,96,181 will go against the interest payment in the first year and the rest Rs 1,05,683 will go against the principal repayment.

Get the tax benefits by investing in housing

Despite, the interest payment of Rs 3,96,181 you will get the deduction benefit of Rs 1,50,000 only. So, the tax benefit under this will be Rs 46,350 - including the education cess - at the rate of 30.9%.

Besides this, though you have repaid Rs 1,05,683 from the principal, you will get a deduction of Rs 20,000 as most of the quota of Rs 1,00,000 is used up by the investments in other instruments.

So, the tax benefit against the principal repayment will be Rs 6,180, making your total benefit at Rs 52,350. But, if you have invested the same amount to buy a house as an investment instrument, you can take the benefit against the interest payment for the entire amount.

Rental income from the house included in the income

In this case, the benefit against the interest payment is not capped. But, there is a catch. The rental income of the house will be included in your income.

But in India, annual rental income, most of the time, is in the range of 2% to 3% of the capital value. Even today, an apartment of Rs 50 lakh is easily available on rent for Rs 10,000 a month. At the same time, the repayment of principal amount will not be allowed for deduction from your taxable income under 80C.

But still, as the interest payment on loan is huge, the rental income does not offset a substantial benefit.

Investing in housing a better option

Take for example a loan of Rs 50,00,000. In this case, the interest payment in the first year is Rs 3,96,181 and the rental income is Rs 1,20,000. But, only 70% of the rental income gets added to your income.

You get a rebate of 30% on rental income against the maintenance of the house. So in the first year, only Rs 84,000 will be included in your income as the house income.

Now, as you spend Rs 3,96,181 as interest payment and Rs 84,000 you earned as house income, you will get a net deduction of Rs 3,12,181 because of your investment in the house. At the rate of 30.09%, you will save a tax of Rs 96,464.