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Tax aspects of Income from House Property
September, 19th 2008

A boom in the Indian real estate market has drawn the attention of investors. The two most active investor segments are High Net Worth Individuals and Non-Resident Indians ("NRIs") who mostly prefer to invest in residential properties.

NRIs can avail a housing loan subject to the terms and conditions as laid down under the FEMA regulations. Such loan can be repaid by way of inward remittance through normal banking channel or from Non Resident (External) Account or Non Resident (Ordinary) Account in India.

The tax benefits available on a housing loan taken for acquisition or construction of property in India:

The EMI you pay for your housing loan includes the principal component as well as the interest component. You can claim deduction for both the components of EMI, on basis of a certificate issued by the lending institution stating the principal and interest paid by you during a financial year.

Deduction on principal

You can claim a deduction under section 80C of the Income Tax Act, 1961 ("the Act") for the amount of principal repaid on the loan along with the amount of stamp duty, registration charges and other expenses incurred for the purpose of transfer of the purchased property starting from the financial year in which the property is acquired or the construction is completed.

Under section 80C of the Act, deduction is available in respect of housing loan taken for the purpose of purchase or construction of a residential house property and the maximum deduction allowed is Rs.1 lakh on a financial year basis.

In order to claim the deduction, you cannot sell the property in question before the expiry of five years from the end of the financial year in which the possession of the same is acquired. If you do so, then the deduction allowable under Section 80C will be discontinued and the amount of deduction allowed in earlier years will be deemed as the borrower's income of the financial year in which the property was sold.

Let us take an example, Neha Bakshi, an NRI takes a housing loan of Rs.18 lakh at a fixed rate on 1 July 2008 for construction of a house (for self occupation) for 10 years at a fixed interest rate of 12% interest. The EMI works out as Rs.29,700 per month. The EMI has a principal component and interest component which progressively change over the term of the loan. For sake of simplicity, let's assume a uniform interest of Rs.12,000 per month and a uniform principal repayment of Rs.17,700 per month. The date of completion of property is say 31 January 2011 (i.e. construction is complete in Financial Year 2010-11).

Neha can start claiming deduction for the principal amount repaid starting from the financial year in which construction is completed i.e. 2010-11. However, she cannot sell the property for the next five years upto 31 March 2016.

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