| Tax planning, a legitimate exercise, should not be confused with tax avoidance or tax evasion. Good tax planning comprises tax compliance and availing proper tax benefits, coupled with proper analysis of the financial implications of a decision.
There are many situations that demand a proper understanding of, and approach to, tax matters. One such situation is where an individual has acquired, constructed, repaired, renewed or reconstructed a residential house.
Where the individual has borrowed capital for purpose, amount of any interest payable for that year, and subject to certain conditions for earlier years, on such borrowing is allowable as deduction from income from house property. If there is a loss as a result of such a claim, it can be set off against other income. Thus, interest paid on such borrowing brings down taxable income.
The maximum deduction that one may claim in respect of such interest is Rs 1, 50,000 in a year if the house is acquired or constructed within three years of borrowing and is self-occupied. However, if the borrowing was made on or before March 31, 1999, the amount of deduction will be restricted to Rs 30,000.
These limits of interest will not be applicable to the following cases: The house is not treated as self occupied; the house is rented out; if a borrowing is made for renovation, renewal or reconstruction of a self-occupied house, a maximum interest of Rs 30,000 only will be allowed, no matter when the money was borrowed.
This benefit must not lure one into borrowing unnecessarily. For example, you earn interest on capital, say, at the rate of 8% per annum. You should not borrow at the rate of 10% per annum, for then you end up losing interest at the rate of 2% per annum. Instead, reduce your interest income by withdrawing capital. That too will reduce taxable income and will result in tax saving.
Besides deduction for interest, one is also eligible for deduction for repayment of principal of housing loans taken for buying or constructing a house. Payment made for stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the individual is also eligible for deduction from income.
The maximum amount of such deduction that one can claim in a year is Rs 1, 00,000, together with certain other payments like life insurance premiums and payments into public provident fund account.
One must note that while deduction of interest on a housing loan is allowed where the loan was taken for buying, constructing, renovating, or reconstructing a house, deduction of repayment of principal amount is allowed if the loan was taken for buying or constructing a house.
Kirit S Sanghvi
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