AMIT is planning to change his current rented accommodation and is wondering whether he should continue with a rented house or buy one of his own. Some of his colleagues have bought their own houses are getting a tax deduction for the interest on the loan taken and Amit is keen to explore this option. Amit plans to spend around Rs 17,000 per month on rent. The annual HRA exemption that he gets is Rs 150,000. Now,assuming he were to take up a loan with a similar EMI,it would translate into a loan of approximately Rs 18 lakhs. He would get a deduction on the interest paid for self-occupied property up to a maximum of Rs 150,000 (this continues under the proposed Direct Taxes Code) and to that extent,he would be neutral between HRA exemption and loan interest deduction. But then what are the differences? Firstly,the principal amount repaid is currently eligible for deduction from taxable income up to Rs 100,000 annually (this category covers life insurance,provident fund,etc) and this is an additional benefit,otherwise the deduction is not fully utilised. This deduction for principal payments is not continued under the proposed Direct Taxes Code effective April 2012. The next aspect is that a rent of Rs 17,000 per month would generally get one a house whose market value is in the range of Rs 45 lakh to Rs 65 lakh,depending on the prevailing trend. Against this,Amit can get a loan of only Rs 18 lakhs with the same EMI and he either has to settle for a house with a lower value or he should have his own funds to bridge the gap between the loan and the property value. Also,the HRA exemption is dependent on the rental costs and basic salary and can thus be even greater than Rs 150,000 annually,for cases in which the rentals are higher. The interest deduction is limited to actual interest paid,subject to a maximum of Rs 150,000 annually for self-occupied property (interest is fully allowed for owned houses which are rented out). Finally,in case of buying a house,the EMIs will stop one day and one would become the absolute owner and be entitled to benefits of appreciation in value. At the same time,buying a house and taking a loan are long-term decisions,compared to rental agreements,which can be changed with job changes or for other reasons. Therefore,before deciding on buying property,take a close look at all these aspects to ensure there are no surprises. Consider consulting your chartered accountant,since buying a house with mortgage is a long-term commitment. The writer is director,Ernst & Young
