The villain causing the confusion is the article ‘a’ used before ‘residential house’. The word seems to imply that the exemption would be available only against purchase of one residential house and not two, or more. In other words, when an assessee invests the capital gains u/s 54 or the net sale proceeds u/s 54F in purchasing or constructing two residential houses, only one of these, as opted for by the assessee, will be allowed for the tax concession.
Now, under this background, one can’t help but wonder whether it was plain English usage that led to the use of the article “a” or did the lawmakers really intend the exemption only for one house. For example consider the following sentences ---
“The constitution bestows upon a citizen the following rights.” --- Does this mean only one citizen or all citizens?
“A man should stand by his rights and duties.” --- Does this pertain only for one man or more than one man?
“A person who comes to the rescue of another person in difficulty is a good Samaritan.” --- Does this include all those persons who help the one or more in difficulties or only one of them?
My feeling is that “a” is used as an article to precede a noun. The other two articles “an” or “the” could not be used for grammatical reasons; therefore “a” had to be used.
Adopting the meaning of the article “a” as “only one” is against the very spirit, purpose and intent of the legislation which desires to give a boost to the housing sector. No wonder, this ambiguity has given rise to conflicting case laws.
In the case of Fulwanti C Rathod v ITO, ITAT Mumbai Bench ‘E’ (ITA 1092/Mum./1995), dt 3.5.02, the learned judge observed, “The word ‘a’ can be equivalent to the word ‘any’. Also as per the General Clauses Act, singular includes plural.” The judge referred to the principle of interpretation that when there was a doubt as to its meaning, it had to be understood in the same sense it harmonised with the objective of the enactment. Referring to the Wealth-tax Act and the Estate Duty Act, the words used therein were, ‘one house’ as against the words ‘a house’ used in the Income-tax Act.
On the other hand, in the case of Mrs. Gulshanbanoo R. Mukhi v Joint CIT Appeal #3369 (BOM) of 2000 [AY 96-97] dt 16.1.02 ITD 649 (Mum) ITAT Mumbai Bench ‘C’, it was held that ‘a’ can be ‘any’ but ‘any’ cannot be ‘many’.
Allahabad High Court in the case of Shiv Narain Chaudhari v CWT (108ITR104) held that if the two flats of the building are situated in same compound and within common boundaries and have unity of structure, then they could be regarded as constituting one house.
In spite of such contradictory decisions arising out of ambiguity, CBDT has not issued any clarification in spite of requests from many quarters, including yours sincerely. We have been given to understand that some of the ITOs have been sticking to the literal meaning of ‘a’ as ‘one’, if they do not like your face; not otherwise.
A difficulty
If the stand that ‘a’ is not two is accepted, then it can be claimed that ‘a’ is also not half. Consequently, if an assessee reinvests an amount in a residential property, jointly held with another individual, say his wife, the related exemptions either u/s 54 or u/s 54F would not be available. Yes, this appears to be preposterous, but we have very strong reasons, backed up by a case law, ITO vs Rasiklal N. Satra (280ITR243 dt 19.9.05).
Here the assessee declared capital gains of Rs. 6,68,698 on sale of shares and claimed exemption u/s 54F by investing the same in purchase of residential flats at Vashi, Navi Mumbai. The Assessing Officer noticed that the assessee was co-owner of a flat in Sion (West), Mumbai. Accordingly, the assessee was asked to explain as to why exemption u/s 54F be not denied. In reply, the assessee contended that he was not an independent owner of the house and exemption can be denied only where the assessee is the absolute owner of the house. He also filed details of purchase of the house which showed that he along with his wife had purchased the house on April 13, 1994, for a total consideration of Rs. 3,05,000 out of which the assessee had invested Rs. 1,60,000 and the balance amount was invested by his wife. However, the Assessing Officer did not accept the contention of the assessee since in his view, the assessee could be said to be the owner of house at Sion (Mumbai) on the date of sale of the original asset.
The learned judge observed, “We proceed on the basis of the language employed by the Legislature. The word ‘residence’, as per Strand's Judicial Dictionary, means a place where an individual or his family eat, drink and sleep. So a residential house would mean a building or part of the building where one can eat, drink and sleep. Here, we may clarify that house is not being equated with a building since a building may comprise of many houses. So house means an independent unit where one can eat, drink and sleep. In view of this definition, we hold that the flat at Sion, Mumbai, was a residential house since the assessee along with his family was living in that house.
“The only question remains as to whether the assessee can be said to be the owner of that residential house. The Legislature has used the word ‘a’ before the words ‘residential house’. In our opinion, it must mean a complete residential house and would not include a shared interest in a residential house. Where the property is owned by more than one person, it cannot be said that any one of them is the owner of the property. In such case, no individual person on his own can sell the entire property. No doubt, he can sell his share of interest in the property but as far as the property is considered, it would continue to be owned by co-owners. Joint ownership is different from absolute ownership. In the case of a residential unit, none of the co-owners can claim that he is the owner of residential house. Ownership of a residential house, in our opinion, means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house. This view of ours is fortified by the judgment of the honourable Supreme Court in the case of Seth Banarsi Dass Gupta v. CIT [1987] 166ITR783, wherein, it was held that a fractional ownership was not sufficient for claiming even fractional depreciation u/s 32 of the Act. Because of this judgment, the Legislature had to amend the provisions of Sec. 32 w.e.f. 1.4.97, by using the expression ‘owned wholly or partly’. So, the word ‘own’ would not include a case where a residential house is partly owned by one person or partly owned by other person(s). After this judgment the Legislature could also amend the provisions of section 54F so as to include part ownership. Since the Legislature has not amended the provisions of Sec. 54F, it has to be held that the word ‘own’ in Sec. 54F would include only the case where a residential house is fully and wholly owned by the assessee and consequently would not include a residential house owned by more than one person. In the present case, admittedly the house at Sion, Mumbai, was purchased jointly by the assessee and his wife. It is nobody's case that the wife is a benami of the assessee. Therefore, the said house was jointly owned by the assessee and his spouse. In view of the discussions made above, it has to be held that the assessee was not the owner of a residential house on the date of transfer of the original asset. Consequently, the exemption under section 54F could not be denied to the assessee.”
Finally
All said and done, all this is theory. In practice, the Department normally grants the exemption on tax on long-term capital gains u/s 54 or 54F only against one house where the assessee has purchased or constructed two or more houses in his own name. However, the exemption is granted even if such a house is held jointly.
Yes, this is the normal practice. But the ITOs are reported to take advantage of the ambiguity depending upon their whims and fancies.
To Conclude
If ‘a’ is one and not two or more, ‘a’ cannot be anything less than one. Clarification from CBDT is imminently required not only to enable the assessees take correct actions and a litigations, but also to ward off rent seeking, if any, by the ITOs.
http://news.moneycontrol.com/india/news/propertyexpert/capitalgainshouseproperty/capitalgainstaxisahouseonehouse/14/38/article/210927
Wednesday, July 18, 2007
New trend: Warranty on property
A warranty is a contractual promise. An individual making a promise is regarded as undertaking contractual liability, therefore, where a warranty exists, the maker undertakes strict liability for what he asserts. In simple words, it is an agreement between a buyer and a seller, detailing the conditions under which the seller will make repairs or fix problems without cost to the buyer.
Also, a warranty is an assurance by the seller of the property to the buyer that a property is as represented or will be as promised and the seller insures the buyer that the insurance risk or all the terms and conditions specified in the contract would be fulfilled as stated to keep the contract effective.
Indian developers are not providing any warranty on properties. The contract or the development agreement details the agreed price, payment and construction schedule, apartment plans, delivery date and the developer’s liability in case of delay in handing over possession and the developer bears no liability after he has handed over possession to the buyer of the property.
The builders are now recognising the need to commit themselves to quality construction to safeguard the interest of the investors and some developers have started offering a warranty on the building and construction material. However, this new trend was introduced for the first time in the history of real estate development by Pune-based Gera Developments, which is now being followed by other real estate developers.
The five-year warranty that is now being provided by some of the developers in India ensures that the property remains in premium condition and covers three main areas: preventive maintenance in the areas of carpentry, electrical diagnostic works, plumbing and bathroom tiles; repairs as a result of improper installation or supply from company’s end, and re-paint of the exteriors of the building to make it look new before the end of five years, which also maintains the prime real estate value of the property.
In this regard, the Government of India should introduce a new legislation that should make it mandatory for all the real estate developers to offer warranty plans to its investors, as it would build an environment of trust and transparency, which is lacking in the real estate sector at present. This will surely help the sellers in getting a better commercial value of the property and the buyers will have a peace of mind while buying such a property. The quality standards in terms of service delivery and construction are not yet up to the mark and the introduction of such legislation would automatically improve it to international level.
http://news.moneycontrol.com/india/news/propertyexpert/null/newtrendwarrantyproperty/14/38/article/187166
Also, a warranty is an assurance by the seller of the property to the buyer that a property is as represented or will be as promised and the seller insures the buyer that the insurance risk or all the terms and conditions specified in the contract would be fulfilled as stated to keep the contract effective.
Indian developers are not providing any warranty on properties. The contract or the development agreement details the agreed price, payment and construction schedule, apartment plans, delivery date and the developer’s liability in case of delay in handing over possession and the developer bears no liability after he has handed over possession to the buyer of the property.
The builders are now recognising the need to commit themselves to quality construction to safeguard the interest of the investors and some developers have started offering a warranty on the building and construction material. However, this new trend was introduced for the first time in the history of real estate development by Pune-based Gera Developments, which is now being followed by other real estate developers.
The five-year warranty that is now being provided by some of the developers in India ensures that the property remains in premium condition and covers three main areas: preventive maintenance in the areas of carpentry, electrical diagnostic works, plumbing and bathroom tiles; repairs as a result of improper installation or supply from company’s end, and re-paint of the exteriors of the building to make it look new before the end of five years, which also maintains the prime real estate value of the property.
In this regard, the Government of India should introduce a new legislation that should make it mandatory for all the real estate developers to offer warranty plans to its investors, as it would build an environment of trust and transparency, which is lacking in the real estate sector at present. This will surely help the sellers in getting a better commercial value of the property and the buyers will have a peace of mind while buying such a property. The quality standards in terms of service delivery and construction are not yet up to the mark and the introduction of such legislation would automatically improve it to international level.
http://news.moneycontrol.com/india/news/propertyexpert/null/newtrendwarrantyproperty/14/38/article/187166
Be legally right while buying property
A few years ago, owning a home was a mere dream for many. But recently, a handful of benefits like tax sops and cheap loans have been a blessing for millions of Indians who are now seeing that dream turn to a reality. In fact more people are buying homes now than ever before and they are buying it very early on in life.
Pallavi and Kartik Iyer are a young couple in Pune who are planning to buy their first home. They've done their research on area and location but have no clue about what documents need to be looked at before signing the agreement. Says Iyer, "We did a lot of research, scanned many websites. They all give out a list of more than 25 documents that we need to look into. It would just be easier if we would know which documents are most vulnerable to tampering"
With real estate being far from transparent, with nothing in clear black and white, Moneycontrol tries to help Iyer and many more like him by handing out a check list of 'grey areas' to watch out for.
Get your papers right!
Who owns the land?
You must verify whether the land is freehold (land owned by the builder) or leasehold (land leased out to the builder from someone else). This becomes important because in case of leasehold land, the owner of the land prescribes his own set of terms and conditions so far as use of the land is concerned. For instance, in case the lease has to be renewed after some years, the owner may charge a premium, which may come as a cost you hadn't planned for.
Builders usually possess the land of construction under their names or hold development agreements with the owners of the land. Says Anuj Puri, MD, Chesterton Meghraj Property Consultants Pvt. Ltd, "In both the cases, the purchaser of the flat must enquire and find out whether the builder is legally permitted to carry out construction on the land on which he proposes to construct the building. In many cases it may be necessary to seek the assistance of a professional to find out whether the builder or developer has good title to the land."
Are all approvals in place?
In the recent past, buildings in several metros faced the threat of being razed to the ground - the reasons - authorities clamped down on them for not complying with approvals. The only other way out is to pay a large fine and get the approval. By then, the builder may already have got off the hook by transferring the property to the co-operative society and residents will have to bear the brunt.
Therefore, as a buyer, you should check whether the builders have all the necessary approvals.
Plan approval, Intimation of Disapproval (IOD) and commencement certificate - key issues
A person in Mumbai (name withheld) booked an apartment on the seventh floor of a building. He had asked the builder for the plan approval and commencement certificate but never got around to seeing it. In the meantime, he did not want to lose out on time and therefore enquired with other buyers about this approval. Most other buyers had seen this approval and hence, he went ahead and booked the apartment. It was only when his bank rejected his loan did he realise that the builder had approval to construct only a six storey building and the seventh floor was a modification, approval for which was still to be taken. His builder convinced him that he would pull strings with the necessary authorities and get the approval, but the entire situation seemed too risky and he pulled out from the deal.
Documents like these are vital to a chaos at a later stage. Likewise, the IOD specifies the conditions subject to which the building should be constructed by the builder. "IOD is issued for one year and if the construction is not completed within one year, it should be re-validated. The purchaser of the flat must verify whether the IOD is issued and if it is issued, the terms and conditions stipulated by the local authorities," says Puri.
The commencement certificate permits the builder to carry out construction of the building and is valid for a year, after which it has to be re-validated. Rajiv Sabharwal, Head, ICICI Home Loans, says, "The customer should ensure that builder has requisite FSI - he should have the commencement certificate issued by Municipal Council and approved plans up to the floor where he is buying a flat."
Agreement of Sale - The fine print
Once you have verified documents, as a buyer, you must enter in to an agreement with the builder or the developer. You have to ensure that the conditions are spelt out clearly, to a problems arising out of ambiguity, in future. Puri elaborates, "Such an agreement should specifically mention flat number, wing, and floor of the building, amenities provided in the flat, terms of payment, date on which the possession of the flat will be given etc."
"Check the carpet area (which is the actual area you get) in addition to built-up or super built-up area," advises Sabharwal. Once the agreement is finalized, stamp duty must be paid on the agreement. Insist on getting an Occupation Certificate (OC) before occupying the flat, to eliminate any problems.
Small but significant
Apart from these larger issues, there are certain areas that may seem minor but are really a must-do.
Hidden costs
Buying a house means talking in terms of lakhs of rupees. Of course, you need to pay attention to the big costs, but in the process do not ignore the smaller costs. Warns Sabharwal, "The buyer should look out for hidden costs - like water connection, electric meter, development charges, clubhouse charges, etc. These should be added to the agreement to sale."
Keep records
Talking of documents, of course, insist on getting all the original ones but equally important, retain photocopies of them as well. Cautions Puri, "Ask for photocopies of the all deeds of title related to the property to be purchased. Examine the deeds to establish the ownership of the property by seller, preferably through an advocate."
What details do you look out for in these? "Ascertain the survey number, village and registration district of the property, as these details are required for registration of the sale. Previous encumbrances and loans, if any on the property must be cleared," says Puri.
http://news.moneycontrol.com/india/news/propertyexpert/realestatebuilders/belegallyrightwhilebuyingproperty/14/38/article/168912
Pallavi and Kartik Iyer are a young couple in Pune who are planning to buy their first home. They've done their research on area and location but have no clue about what documents need to be looked at before signing the agreement. Says Iyer, "We did a lot of research, scanned many websites. They all give out a list of more than 25 documents that we need to look into. It would just be easier if we would know which documents are most vulnerable to tampering"
With real estate being far from transparent, with nothing in clear black and white, Moneycontrol tries to help Iyer and many more like him by handing out a check list of 'grey areas' to watch out for.
Get your papers right!
Who owns the land?
You must verify whether the land is freehold (land owned by the builder) or leasehold (land leased out to the builder from someone else). This becomes important because in case of leasehold land, the owner of the land prescribes his own set of terms and conditions so far as use of the land is concerned. For instance, in case the lease has to be renewed after some years, the owner may charge a premium, which may come as a cost you hadn't planned for.
Builders usually possess the land of construction under their names or hold development agreements with the owners of the land. Says Anuj Puri, MD, Chesterton Meghraj Property Consultants Pvt. Ltd, "In both the cases, the purchaser of the flat must enquire and find out whether the builder is legally permitted to carry out construction on the land on which he proposes to construct the building. In many cases it may be necessary to seek the assistance of a professional to find out whether the builder or developer has good title to the land."
Are all approvals in place?
In the recent past, buildings in several metros faced the threat of being razed to the ground - the reasons - authorities clamped down on them for not complying with approvals. The only other way out is to pay a large fine and get the approval. By then, the builder may already have got off the hook by transferring the property to the co-operative society and residents will have to bear the brunt.
Therefore, as a buyer, you should check whether the builders have all the necessary approvals.
Plan approval, Intimation of Disapproval (IOD) and commencement certificate - key issues
A person in Mumbai (name withheld) booked an apartment on the seventh floor of a building. He had asked the builder for the plan approval and commencement certificate but never got around to seeing it. In the meantime, he did not want to lose out on time and therefore enquired with other buyers about this approval. Most other buyers had seen this approval and hence, he went ahead and booked the apartment. It was only when his bank rejected his loan did he realise that the builder had approval to construct only a six storey building and the seventh floor was a modification, approval for which was still to be taken. His builder convinced him that he would pull strings with the necessary authorities and get the approval, but the entire situation seemed too risky and he pulled out from the deal.
Documents like these are vital to a chaos at a later stage. Likewise, the IOD specifies the conditions subject to which the building should be constructed by the builder. "IOD is issued for one year and if the construction is not completed within one year, it should be re-validated. The purchaser of the flat must verify whether the IOD is issued and if it is issued, the terms and conditions stipulated by the local authorities," says Puri.
The commencement certificate permits the builder to carry out construction of the building and is valid for a year, after which it has to be re-validated. Rajiv Sabharwal, Head, ICICI Home Loans, says, "The customer should ensure that builder has requisite FSI - he should have the commencement certificate issued by Municipal Council and approved plans up to the floor where he is buying a flat."
Agreement of Sale - The fine print
Once you have verified documents, as a buyer, you must enter in to an agreement with the builder or the developer. You have to ensure that the conditions are spelt out clearly, to a problems arising out of ambiguity, in future. Puri elaborates, "Such an agreement should specifically mention flat number, wing, and floor of the building, amenities provided in the flat, terms of payment, date on which the possession of the flat will be given etc."
"Check the carpet area (which is the actual area you get) in addition to built-up or super built-up area," advises Sabharwal. Once the agreement is finalized, stamp duty must be paid on the agreement. Insist on getting an Occupation Certificate (OC) before occupying the flat, to eliminate any problems.
Small but significant
Apart from these larger issues, there are certain areas that may seem minor but are really a must-do.
Hidden costs
Buying a house means talking in terms of lakhs of rupees. Of course, you need to pay attention to the big costs, but in the process do not ignore the smaller costs. Warns Sabharwal, "The buyer should look out for hidden costs - like water connection, electric meter, development charges, clubhouse charges, etc. These should be added to the agreement to sale."
Keep records
Talking of documents, of course, insist on getting all the original ones but equally important, retain photocopies of them as well. Cautions Puri, "Ask for photocopies of the all deeds of title related to the property to be purchased. Examine the deeds to establish the ownership of the property by seller, preferably through an advocate."
What details do you look out for in these? "Ascertain the survey number, village and registration district of the property, as these details are required for registration of the sale. Previous encumbrances and loans, if any on the property must be cleared," says Puri.
http://news.moneycontrol.com/india/news/propertyexpert/realestatebuilders/belegallyrightwhilebuyingproperty/14/38/article/168912
Documents you need to buy that dream home
Q: What are the documents needed for transfer of allotment of flat in case of death?
A: The papers to be submitted are
(a) affidavits about the surviving legal heirs from the transferee made on non-judicial stamp paper of Rs. 10,
(b) relinquishment deed on Rs. 100 non-judicial stamp paper duly registered,(c) undertaking from the transferee on non-judicial stamp paper of Rs. 10,
(d) indemnity bond from the tranferee on Rs. 100 non-judicial stamp paper,
(e) original death certificate,
(f) no-objection certificate from the employer/government or loan-giving agency if advance for house building has been obtained,
(g) documentary evidence of relationship i.e., attested photocopy of school leaving certificate or passport and ration card duly attested by a gazetted officer; and photograph of the transferee with three signatures duly attested by a gazetted officer.
Q: Which are documents required for executing a conveyance deed?
A: The documents for this purpose consist of a photocopy of possession slip indicating the date on which the allottee took possession, NOC from the office/bank/ financial Institution if loan has been taken and if not, an affidavit to the effect that no loan has been taken from any such organization, photocopy of the treasury challan for having deposited the stamp duty to the Delhi government, and names and addresses of two witnesses, along with their identification (electoral card/ration card, PAN or passport) along with four unattested passport-size photographs.
Q: What is the benefit of getting the property mutated?
A: Mutation is beneficial because otherwise the local authorities do not recognize the purchaser of the immovable property as the new owner. All the property tax bills and payment thereof would continue to be in the name of the previous owner. Further, if the new owner intends to sell the property, it would be difficult for him to do so if the property does not stand mutated in his name.
Q: What are the documents necessary for mutation of property as I am having GPA in my name?
A: Generally the documents needed in this case are copies of the power of attorney and the Will, receipt of payment duly registered by the sub-registrar, application for mutation with Rs. 3 court fee stamp affixed on it, indemnity bond on a Rs. 100 stamp paper, affidavit on Rs. 10 stamp paper and clearance of the latest property tax.
Q: Is any permission required if I undertake additions and alterations in my flat?
A: For minor additions or alterations, which do not require structural changes, no permission is needed. But if you are planning any major transformation that necessitates structural changes, you have to contact the DDA or the MCD and secure permission from them.
http://news.moneycontrol.com/india/news/property/propertypurchasedocumentsvijaychawla/documentsyouneedtobuythatdreamhome/14/27/article/202019
A: The papers to be submitted are
(a) affidavits about the surviving legal heirs from the transferee made on non-judicial stamp paper of Rs. 10,
(b) relinquishment deed on Rs. 100 non-judicial stamp paper duly registered,(c) undertaking from the transferee on non-judicial stamp paper of Rs. 10,
(d) indemnity bond from the tranferee on Rs. 100 non-judicial stamp paper,
(e) original death certificate,
(f) no-objection certificate from the employer/government or loan-giving agency if advance for house building has been obtained,
(g) documentary evidence of relationship i.e., attested photocopy of school leaving certificate or passport and ration card duly attested by a gazetted officer; and photograph of the transferee with three signatures duly attested by a gazetted officer.
Q: Which are documents required for executing a conveyance deed?
A: The documents for this purpose consist of a photocopy of possession slip indicating the date on which the allottee took possession, NOC from the office/bank/ financial Institution if loan has been taken and if not, an affidavit to the effect that no loan has been taken from any such organization, photocopy of the treasury challan for having deposited the stamp duty to the Delhi government, and names and addresses of two witnesses, along with their identification (electoral card/ration card, PAN or passport) along with four unattested passport-size photographs.
Q: What is the benefit of getting the property mutated?
A: Mutation is beneficial because otherwise the local authorities do not recognize the purchaser of the immovable property as the new owner. All the property tax bills and payment thereof would continue to be in the name of the previous owner. Further, if the new owner intends to sell the property, it would be difficult for him to do so if the property does not stand mutated in his name.
Q: What are the documents necessary for mutation of property as I am having GPA in my name?
A: Generally the documents needed in this case are copies of the power of attorney and the Will, receipt of payment duly registered by the sub-registrar, application for mutation with Rs. 3 court fee stamp affixed on it, indemnity bond on a Rs. 100 stamp paper, affidavit on Rs. 10 stamp paper and clearance of the latest property tax.
Q: Is any permission required if I undertake additions and alterations in my flat?
A: For minor additions or alterations, which do not require structural changes, no permission is needed. But if you are planning any major transformation that necessitates structural changes, you have to contact the DDA or the MCD and secure permission from them.
http://news.moneycontrol.com/india/news/property/propertypurchasedocumentsvijaychawla/documentsyouneedtobuythatdreamhome/14/27/article/202019
Take a loan or buy out of own funds
If you want to buy a house, you have two options. Either take a loan or use your own funds. Most of us obviously would not be able to afford an outright purchase (without availing of any loan whatsoever). However, even those fortunate few who have the wherewithal to buy a house off the shelf, should avail themselves of a loan. Let us see why.
Well, for starters, interest outgo on the loan up to Rs. 1,50,000 is tax deductible. Moreover, the capital repayments are eligible for Sec80C deduction up to Rs. 1,00,000. Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits available for someone who wants to buy his property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.
Now taking a step further. How much loan should you opt for? If you take a loan, you pay a higher rate of interest than what you earn on your own funds. So should you use your funds for buying the house? In that case, you lose the tax advantage.
Therefore, you have to weigh the benefit of the tax advantage of taking a loan against the loss due to higher interest outflow. Obviously, there is a break-even point which can help you in arriving at the optimal mix. The answer would of course depend upon variable parameters like the interest rate on the loan and what your own funds earn outside.
Let us try and find out what it is with an example.
We assume that one Mr. Mistry has taken a housing loan of Rs. 20 lakh @9% p.a., whereas his owned funds earn just 6.34% p.a.. The reason why I have chosen this curious figure of 6.34% will become clear in a while.
Anyway, coming back to Mr. Mistry, it is assumed that he is in the 30% bracket. (These figures are for ease of understanding and computations, in reality, the numbers would differ depending upon the interest rates in the economy. However, the principle would remain the same.)
The premise of the calculation is one’s own funds are freed up to the extent of the loan taken. In other words, if Mr. Mistry were to take a loan of Rs. 20 lakhs, it basically means that his personal funds to the extent of Rs. 20 lakh are available to be invested elsewhere which otherwise would not have been. The comparison is done based on these figures. Now look at the Table. Its essentially in two parts. The first part deals with the loan cashflows whereas the second part is regarding Mr. Mistry’s personal cashflows including that from investment.
It is assumed that the loan availed of is Rs. 20 lakh. The term is for 15 years. At an interest rate of 9% p.a., the EMI works out to Rs. 2,48,118. For simplicity, annual figures are taken. In actual practice, EMIs are paid monthly. The total interest paid out for the first year is Rs. 1,80,000. The closing balance for the first year is Rs. 20 lakhs less the capital repaid during the year.
Now coming to the second part of the table. As already discussed, since a loan of Rs. 20 lakhs is taken, Mr. Mistry can invest a similar amount of personal funds as he pleases. These funds (it is assumed) earn an pre-tax interest of 6.34% p.a. Therefore, the interest received for the first year would be Rs. 1,26,884.
What about the tax break on the EMIs? Taxes saved is money not paid i.e. it is money earned. Readers would know that housing loan interest is deductible to the extent of Rs. 1,50,000 per annum. Therefore, at a 30% tax rate, the advantage works out to Rs. 45,000 and so on. Similarly, the principal repayments are deductible under sec. 80C subject to the overall limit of Rs. 1,00,000. In the first year, Mr. Mistry repays capital to the extent of Rs. 68,118 and @30% the tax advantage is Rs. 20,435. The rest of the table is self explanatory.
Amount Rs. 2,000,000 ------Interest Rates-----
Loan Period 15 years On Loan 9.00% p.a
EMI (annual) Rs. 248,118 On Own Funds 6.34% p.a
Tax Zone 30%
Year Loan Taken Interest Capital Closing
Paid Repayment Balance
A B C D E=B-D
1 2,000,000 180,000 68,118 1,931,882
2 1,931,882 173,869 74,248 1,857,634
3 1,857,634 167,187 80,931 1,776,703
4 1,776,703 159,903 88,214 1,688,489
5 1,688,489 151,964 96,154 1,592,335
6 1,592,335 143,310 104,808 1,487,527
7 1,487,527 133,877 114,240 1,373,287
8 1,373,287 123,596 124,522 1,248,765
9 1,248,765 112,389 135,729 1,113,036
10 1,113,036 100,173 147,945 965,092
11 965,092 86,858 161,260 803,832
12 803,832 72,345 175,773 628,059
13 628,059 56,525 191,592 436,467
14 436,467 39,282 208,836 227,631
15 227,631 20,487 227,631 0
Own Funds Interest Tax Tax Tax Closing
Received Paid Saved Saved Balance
F G on I on P
2,000,000 126,844 38,053 45,000 20,435 1,906,109
1,906,109 120,890 36,267 45,000 22,275 1,809,888
1,809,888 114,787 34,436 45,000 24,279 1,711,400
1,711,400 108,541 32,562 45,000 26,464 1,610,725
1,610,725 102,156 30,647 45,000 28,846 1,507,963
1,507,963 95,638 28,691 42,993 30,000 1,399,785
1,399,785 88,777 26,633 40,163 30,000 1,283,974
1,283,974 81,432 24,430 37,079 30,000 1,159,938
1,159,938 73,566 22,070 33,717 30,000 1,027,033
1,027,033 65,137 19,541 30,052 30,000 884,563
884,563 56,101 16,830 26,057 30,000 731,773
731,773 46,411 13,923 21,703 30,000 567,846
567,846 36,014 10,804 16,958 30,000 391,896
391,896 24,855 7,456 11,785 30,000 202,961
202,961 12,872 3,862 6,146 30,000 0
The last column of the table is basically Mr. Mistry’s personal cashflow. The inflows are the interest earned and the tax saving on the interest and principal paid, whereas the outflows are the interest paid itself as well as the capital repayment.
In other words, because Mr. Mistry has taken the loan, his capital that he would have otherwise used for buying the house can earn some interest over the 15 year period. Similarly, all throughout, he will also get tax breaks on interest and principal. On the flip side, he will pay EMIs for the 15 years. Now, if after accounting for the above inflows and outflows, over 15 years, if Mr. Mistry were to end up with a zero balance, he would be indifferent to buying the house outright now or taking a loan. But if he were to end up having a positive bank balance, then he should take the loan and vice versa.
The above table throws up this indifference point. Putting it differently, were Mr. Mistry able to earn just 6.34% p.a. pre tax from his funds, it would make no difference to him whether he uses his own money for the property or whether he takes a loan. In other words, the break-even point in this case is 6.34% p.a.
What if instead of 6.34%, Mr. Mistry were able to earn 8% p.a. on his funds? Then it behooves him to go in for the loan by all means. If the revised numbers are plugged in the spreadsheet, one finds that Mr. Mistry would benefit by about Rs. 3.50 lakhs by opting for the loan.
Conversely, what if he were able to earn just 3% p.a.? In this case, by taking a loan, he would lose around Rs. 5.14 lakhs. So you see, this is a very powerful tool for every potential homeowner to determine the extent he should leverage himself.
Mr. Mistry happened to be in the 30% tax zone. If he were in the 20% tax zone, he would need to earn 7.51% p.a. and if he were in the 10% tax zone, his funds would need to earn 8.36% p.a. to break-even.
Basically, what these calculations throw up is nothing new. It is just restating the obvious but in terms of cold numbers. The greatest advantage of taking a loan emanates out of the tax breaks. It is in the interest of the investor to maximise these tax breaks. Using own funds results in foregoing the tax advantage.
Also note that the ceiling of Rs. 1,50,000 on interest is only in the case of self-occupied property. In the case of let out property, there is no ceiling on the interest deduction i.e. full interest paid is deductible. In this case, obviously, taking a loan would be advantageous. There is no question of using one’s own funds.
To Sum
If you are not in a position to use your own resources, then by all means avail of a loan. Interest rates though on the upswing lately are still very attractive and there is no better time to avail of a housing loan than the present. But if you do have the wherewithal to fund your own house, then remember to carry out the above analysis first.
http://news.moneycontrol.com/india/news/loans/sandeepshanbhag/takeloanorbuyoutownfunds/14/29/article/210707
Well, for starters, interest outgo on the loan up to Rs. 1,50,000 is tax deductible. Moreover, the capital repayments are eligible for Sec80C deduction up to Rs. 1,00,000. Now, if one were to use one’s own funds, these benefits are forgone. There are absolutely no tax benefits available for someone who wants to buy his property outright without taking a loan! This does seem a bit unfair, but that’s the way the law is.
Now taking a step further. How much loan should you opt for? If you take a loan, you pay a higher rate of interest than what you earn on your own funds. So should you use your funds for buying the house? In that case, you lose the tax advantage.
Therefore, you have to weigh the benefit of the tax advantage of taking a loan against the loss due to higher interest outflow. Obviously, there is a break-even point which can help you in arriving at the optimal mix. The answer would of course depend upon variable parameters like the interest rate on the loan and what your own funds earn outside.
Let us try and find out what it is with an example.
We assume that one Mr. Mistry has taken a housing loan of Rs. 20 lakh @9% p.a., whereas his owned funds earn just 6.34% p.a.. The reason why I have chosen this curious figure of 6.34% will become clear in a while.
Anyway, coming back to Mr. Mistry, it is assumed that he is in the 30% bracket. (These figures are for ease of understanding and computations, in reality, the numbers would differ depending upon the interest rates in the economy. However, the principle would remain the same.)
The premise of the calculation is one’s own funds are freed up to the extent of the loan taken. In other words, if Mr. Mistry were to take a loan of Rs. 20 lakhs, it basically means that his personal funds to the extent of Rs. 20 lakh are available to be invested elsewhere which otherwise would not have been. The comparison is done based on these figures. Now look at the Table. Its essentially in two parts. The first part deals with the loan cashflows whereas the second part is regarding Mr. Mistry’s personal cashflows including that from investment.
It is assumed that the loan availed of is Rs. 20 lakh. The term is for 15 years. At an interest rate of 9% p.a., the EMI works out to Rs. 2,48,118. For simplicity, annual figures are taken. In actual practice, EMIs are paid monthly. The total interest paid out for the first year is Rs. 1,80,000. The closing balance for the first year is Rs. 20 lakhs less the capital repaid during the year.
Now coming to the second part of the table. As already discussed, since a loan of Rs. 20 lakhs is taken, Mr. Mistry can invest a similar amount of personal funds as he pleases. These funds (it is assumed) earn an pre-tax interest of 6.34% p.a. Therefore, the interest received for the first year would be Rs. 1,26,884.
What about the tax break on the EMIs? Taxes saved is money not paid i.e. it is money earned. Readers would know that housing loan interest is deductible to the extent of Rs. 1,50,000 per annum. Therefore, at a 30% tax rate, the advantage works out to Rs. 45,000 and so on. Similarly, the principal repayments are deductible under sec. 80C subject to the overall limit of Rs. 1,00,000. In the first year, Mr. Mistry repays capital to the extent of Rs. 68,118 and @30% the tax advantage is Rs. 20,435. The rest of the table is self explanatory.
Amount Rs. 2,000,000 ------Interest Rates-----
Loan Period 15 years On Loan 9.00% p.a
EMI (annual) Rs. 248,118 On Own Funds 6.34% p.a
Tax Zone 30%
Year Loan Taken Interest Capital Closing
Paid Repayment Balance
A B C D E=B-D
1 2,000,000 180,000 68,118 1,931,882
2 1,931,882 173,869 74,248 1,857,634
3 1,857,634 167,187 80,931 1,776,703
4 1,776,703 159,903 88,214 1,688,489
5 1,688,489 151,964 96,154 1,592,335
6 1,592,335 143,310 104,808 1,487,527
7 1,487,527 133,877 114,240 1,373,287
8 1,373,287 123,596 124,522 1,248,765
9 1,248,765 112,389 135,729 1,113,036
10 1,113,036 100,173 147,945 965,092
11 965,092 86,858 161,260 803,832
12 803,832 72,345 175,773 628,059
13 628,059 56,525 191,592 436,467
14 436,467 39,282 208,836 227,631
15 227,631 20,487 227,631 0
Own Funds Interest Tax Tax Tax Closing
Received Paid Saved Saved Balance
F G on I on P
2,000,000 126,844 38,053 45,000 20,435 1,906,109
1,906,109 120,890 36,267 45,000 22,275 1,809,888
1,809,888 114,787 34,436 45,000 24,279 1,711,400
1,711,400 108,541 32,562 45,000 26,464 1,610,725
1,610,725 102,156 30,647 45,000 28,846 1,507,963
1,507,963 95,638 28,691 42,993 30,000 1,399,785
1,399,785 88,777 26,633 40,163 30,000 1,283,974
1,283,974 81,432 24,430 37,079 30,000 1,159,938
1,159,938 73,566 22,070 33,717 30,000 1,027,033
1,027,033 65,137 19,541 30,052 30,000 884,563
884,563 56,101 16,830 26,057 30,000 731,773
731,773 46,411 13,923 21,703 30,000 567,846
567,846 36,014 10,804 16,958 30,000 391,896
391,896 24,855 7,456 11,785 30,000 202,961
202,961 12,872 3,862 6,146 30,000 0
The last column of the table is basically Mr. Mistry’s personal cashflow. The inflows are the interest earned and the tax saving on the interest and principal paid, whereas the outflows are the interest paid itself as well as the capital repayment.
In other words, because Mr. Mistry has taken the loan, his capital that he would have otherwise used for buying the house can earn some interest over the 15 year period. Similarly, all throughout, he will also get tax breaks on interest and principal. On the flip side, he will pay EMIs for the 15 years. Now, if after accounting for the above inflows and outflows, over 15 years, if Mr. Mistry were to end up with a zero balance, he would be indifferent to buying the house outright now or taking a loan. But if he were to end up having a positive bank balance, then he should take the loan and vice versa.
The above table throws up this indifference point. Putting it differently, were Mr. Mistry able to earn just 6.34% p.a. pre tax from his funds, it would make no difference to him whether he uses his own money for the property or whether he takes a loan. In other words, the break-even point in this case is 6.34% p.a.
What if instead of 6.34%, Mr. Mistry were able to earn 8% p.a. on his funds? Then it behooves him to go in for the loan by all means. If the revised numbers are plugged in the spreadsheet, one finds that Mr. Mistry would benefit by about Rs. 3.50 lakhs by opting for the loan.
Conversely, what if he were able to earn just 3% p.a.? In this case, by taking a loan, he would lose around Rs. 5.14 lakhs. So you see, this is a very powerful tool for every potential homeowner to determine the extent he should leverage himself.
Mr. Mistry happened to be in the 30% tax zone. If he were in the 20% tax zone, he would need to earn 7.51% p.a. and if he were in the 10% tax zone, his funds would need to earn 8.36% p.a. to break-even.
Basically, what these calculations throw up is nothing new. It is just restating the obvious but in terms of cold numbers. The greatest advantage of taking a loan emanates out of the tax breaks. It is in the interest of the investor to maximise these tax breaks. Using own funds results in foregoing the tax advantage.
Also note that the ceiling of Rs. 1,50,000 on interest is only in the case of self-occupied property. In the case of let out property, there is no ceiling on the interest deduction i.e. full interest paid is deductible. In this case, obviously, taking a loan would be advantageous. There is no question of using one’s own funds.
To Sum
If you are not in a position to use your own resources, then by all means avail of a loan. Interest rates though on the upswing lately are still very attractive and there is no better time to avail of a housing loan than the present. But if you do have the wherewithal to fund your own house, then remember to carry out the above analysis first.
http://news.moneycontrol.com/india/news/loans/sandeepshanbhag/takeloanorbuyoutownfunds/14/29/article/210707
Home loan rates on the climb again
RBI turn on the heat
The credit policy has brought in selective controls for the housing sector. The requirement of increased provisioning by banks i.e. setting aside a portion of profits to cover possible defaults, residential housing loans along with commercial real estate loans will make them costlier. “RBI has noted the rapid increase in loans to the real estate sector and as much to the housing loan industry. As we are aware there was a 84% increase in credit offtake and this is what RBI wants to slow down until normalcy is reached”, opines Pritam Chivukula, Head Agency, Colliers International.
How will affect the home loan interest rates?
The banks expectedly are going to pass on the cost to the consumer but the rate increase is likely to be selective. “With the provisioning norms being hiked from 0.4% to 1% and with existing liquidity issues, banks will be forced to hike interest rates for home loans esp. for loans over 20 lacs. There is an expected increase between 25-50 basis points”, says Pritam Chivukula.
Banks have not yet jumped into the bandwagon of increasing rates though it seems that they are waiting for each other to break the still waters. Pankaj Desai, Head Retail Assets, Kotak Bank is cautious in his approach, “It is too early. There has not been any change in rates so far but we expect the rates to go up in near future.”
What should be your strategy?
If you are a loan seeker or have a floating rate loan under Rs 20 lacs
You are least likely to be affected. We do not expect home loan rates to increase in this pocket. The rates should remain stable here as the increase in this segment has already taken place and the banks would be not be inclined to touch this bracket.
If you a loan seeker or have a floating rate loan over Rs 20 lacs
Bad news for you. The rates are moving up for this segment however the hike should be about 50 basis point. With RBI asking the banks to slow the credit offtake in this segment the high-end segment is going to be the first where the breaks will be applied.
What experts are saying
Pritam Chivukula, Head Agency
Colliers International
Home loans seekers generally run a home loan for an average of 8-10 years. Thus short term increase in rates should not distract consumers from going for variable rates because over the tenor of the loan the rate will average out in favour of the consumer as India aligns itself to rates prevailing in the developed markets.
Pankaj Desai, Head Retail Assets
Kotak Bank
There are not many options available for fixed rate. We believe that floating rate is a better option since the customer will get benefit of lower rate if rates go down in future. Also, the fixed option will be expensive and there is no sense in committing oneself to higher rate for the entire tenor of the loan.
http://news.moneycontrol.com/india/news/loans/creditpolicyhomeloan/homeloanratesclimbagain/14/29/article/211253
The credit policy has brought in selective controls for the housing sector. The requirement of increased provisioning by banks i.e. setting aside a portion of profits to cover possible defaults, residential housing loans along with commercial real estate loans will make them costlier. “RBI has noted the rapid increase in loans to the real estate sector and as much to the housing loan industry. As we are aware there was a 84% increase in credit offtake and this is what RBI wants to slow down until normalcy is reached”, opines Pritam Chivukula, Head Agency, Colliers International.
How will affect the home loan interest rates?
The banks expectedly are going to pass on the cost to the consumer but the rate increase is likely to be selective. “With the provisioning norms being hiked from 0.4% to 1% and with existing liquidity issues, banks will be forced to hike interest rates for home loans esp. for loans over 20 lacs. There is an expected increase between 25-50 basis points”, says Pritam Chivukula.
Banks have not yet jumped into the bandwagon of increasing rates though it seems that they are waiting for each other to break the still waters. Pankaj Desai, Head Retail Assets, Kotak Bank is cautious in his approach, “It is too early. There has not been any change in rates so far but we expect the rates to go up in near future.”
What should be your strategy?
If you are a loan seeker or have a floating rate loan under Rs 20 lacs
You are least likely to be affected. We do not expect home loan rates to increase in this pocket. The rates should remain stable here as the increase in this segment has already taken place and the banks would be not be inclined to touch this bracket.
If you a loan seeker or have a floating rate loan over Rs 20 lacs
Bad news for you. The rates are moving up for this segment however the hike should be about 50 basis point. With RBI asking the banks to slow the credit offtake in this segment the high-end segment is going to be the first where the breaks will be applied.
What experts are saying
Pritam Chivukula, Head Agency
Colliers International
Home loans seekers generally run a home loan for an average of 8-10 years. Thus short term increase in rates should not distract consumers from going for variable rates because over the tenor of the loan the rate will average out in favour of the consumer as India aligns itself to rates prevailing in the developed markets.
Pankaj Desai, Head Retail Assets
Kotak Bank
There are not many options available for fixed rate. We believe that floating rate is a better option since the customer will get benefit of lower rate if rates go down in future. Also, the fixed option will be expensive and there is no sense in committing oneself to higher rate for the entire tenor of the loan.
http://news.moneycontrol.com/india/news/loans/creditpolicyhomeloan/homeloanratesclimbagain/14/29/article/211253
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