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Query corner: Complexities of tax
March, 23rd 2010

I am planning to buy one flat which is under construction. What tax benefits can I get on home loan till I get the possession?

You can start claiming tax benefits on interest payable and principal repayments only from the year in which the construction of the property is completed. However, interest payable during prior years can be claimed as deduction in five equal instalments starting from the year in which construction is completed and in four subsequent financial years.

An NRI invested long-term capital gain of Rs 5 lakh in sale of a plot of land by booking a flat under construction. The plot of land on which gain was earned was sold in November 2006 and the capital gain account was paid to the builder during 2008. The possession is likely to be made during 2011. How much tax would be payable?
SK Handa

In certain cases, the allotment of flat is considered as construction. Refer to circular 471 dated 15-10-1986 and 672 dated 16-12-1993. If this is not applicable to you, income tax on deemed capital gains is payable @ 20.6%.

I have purchased a new flat from the builder in June 2009, with a housing loan of Rs 5,00,000. I want to sell my present flat and repay the housing loan fully from the capital gains. Will I get long-term gain tax exemption from the repayment of loan? If I dont invest in capital gains bonds, then how much tax is to be paid?
V M Rao

You would be eligible to claim exemption on long-term capital gains if the sale takes place before September 2009. The amount of exemption would be lower than total cost of the new flat which was purchased in June 2009 and the amount of capital gain.

If you do not make investment in bonds, you will have to pay tax @ 20.6% on the balance capital gains. The assumption is you already have taxable income from other sources beyond basic exemption limit. You can obtain application for Capital Gains Tax Saving Bonds on the website of Rural Electrification Corporation and National Highway Authority of India.

I took a home loan from my department. I have purchased an under construction house and have taken a home loan from SBI. How can I claim the tax benefits?

Tax deductions on interest and principal repayment of the second house would start only from the year you obtain possession. If you then let out the second house, the rental income would be taxable. If it remains vacant, a notional rent would be used in the tax computation. From such rental income, you can deduct:
1) property tax paid
2) repairs and maintenance @ 30% of (rental income less property tax)
and 3) the interest payable on housing loan.

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