Home Loans Vs Land Loans

While home loans are easily available for salaried employees, what about a loan to buy a residential plot? Plot loans are also available without too much difficulty and, in most cases, at the same rates as a home loan. But other terms and conditions could be different. It definitely requires some planning. Let us understand more on Land Loans...

TDS on property sale in India Section 194-IA

This is a new tax, applicable from 1st June 2013, deducted at source, on sale of any immovable property (other than agricultural land) costing more than Rs.50 lakh u/s 194-IA

This tax will be called as withholding tax.

Home Insurance for an Apartment Flat in India

Any standard home insurance policy will protect the structure of your house and its contents from perils such as fire, flood and earthquake. The terms are therefore straight if the house is on your own land. However, if you own an apartment, which is equally exposed to the dangers of getting partially damaged or completely razed by a natural or man-made calamity, it may raise some queries in your mind considering that your apartment is just one part of the complete building. Let us find more.

Reduce your tax burden by owning a second house

Background
As your wealth goes up, you need to get innovative about the options that are available to multiply it further and faster. One of the lesser known options is to own a second home and get "unlimited" tax benefit on the interest portion of the home loan. Yes, theoretically, the tax benefit is unlimited since there is no cap to the interest amount eligible for tax benefit (the way you have a cap of rupees 1.5 Lacs on the interest part of the first home loan)

What is a Home Saver Loan

Background
Home Loans or Mortgage is one set of financial transactions that almost everyone of us is bound to encounter at least once during our life time, and then deal with it for a majority of our life. So, any available option in this area should be explored very carefully.

Most of us, after a few years of running a successful EMI schedule would also look at the option of pre-payment of home loans. 
Pre-payment of home loan is a double-edged sword. It reduces the future obligation but at the same time, also incurs opportunity cost and risk in case of an emergency when you urgently need cash. This is exactly where a home saver loan helps.

Income from House Property Part-3 (Sec 22 and 24 IT Act)

In this series of posts, we have been covering the tax awareness on Income from House property (Sec-22 and Sec-24 of IT Act). We have covered 2 parts till now and we are covering the 3rd and ultimate part today.

Part-1 : Sec-22 : Basis of Charge (House Property)

Part-2 : Sec-24 : Income from Let House Property

Part-3 : Sec-24 : Income from Self Occupied Property (current post)

In the last two posts, we essentially studied the following:
Part-1 : Sec -22 of Income Tax Act which talks about what is considered a house property and what kind of taxes are applicable on the same.
Part-2 : We studied Sec-24 of IT Act. Once you have a taxable house property which is worthy of generating income for you, we must understand the applicability of Sec-24 for a rented out property.

The applicability of Sec-24 is covered under two sections (and hence Part-2 and Part-3 of this series of posts)

So, lets read on the Computation of Income from a self-occupied Property.

Income from House Property Part-2 (Sec 22 and 24 IT Act)

In the last post(Income from House Property Part-I (Sec 22 and 24 IT Act)), we studied essentially about Sec -22 of Income Tax Act which talks about what is considered a house property and what kind of taxes are applicable on the same.

Today, in Part-2 of this series of posts on "Income from House Property", we would study Sec-24 of IT Act. Once you have a taxable house property which is worthy of generating income for you, we must understand the applicability of Sec-24.

The applicability of Sec-24 is covered under two sections (and hence Part-2 and Part-3 of this series of posts)

This series of posts:

Part-1 : Sec-22 : Basis of Charge (House Property)

Part-2 : Sec-24 : Income from Let House Property (current post)

Part-3 : Sec-24 : Income from Self Occupied Property (next post)

So, lets read on the Computation of Income from Let House Property

Income from House Property Part-I (Sec 22 and 24 IT Act)

As your wealth grows, so is your tax liability. Hence, understanding of tax laws can play a critical role in paying the correct taxes. Income Tax laws can be sometimes very complex but if we understand the intent behind the specific law, it becomes all the more easier to interpret, understand and follow these laws.

"Income from House Property" is one of the most often misunderstood laws in Indian Income Tax Laws. Very often, we confuse it with the rental income, loan interest and many other such misconstrued notions. We are going to deal with this specific section of the IT act under a series of posts starting today.

Today, we deal with Part-I which is understanding the fundamental meaning of this Income Tax law under Section 22 of the IT Act, which deals with understanding the meaning of "Income from House Property".

What is Reverse Mortgage Loan

What is Mortgage?

We understood the fundamentals on mortgage in one of earlier posts titled : "Understanding Mortgage" . I would suggest you to go through the details of Mortgage before getting in to understand about Reverse Mortgage.

In layman's definition, a mortgage is a loan to finance the purchase of one's home. This is clearly the biggest debt that you would ever get into in your life.

Literally, The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.

What is Reverse Mortgage Loan (RML) ?

Reverse mortgage is a loan that enables home owners above 60 years of age to convert a part of their self-owned home equity into income without having to sell it.

Tax Exemption Provision for Capital Gains through Property

 

Real Estate Capital gains is one of the biggest single transaction gains that you would ever have in your portfolio. If the Capital Gain is high, the tax liability would obviously be one of the highest. In one of our recent posts, we studied in detail about the tax liability on capital gains on account of real estate or property. ( Preserve your Property Gains ). 

Hence, it becomes all the more important to understand what you can do with the capital gains that we have so as to minimize or completely eliminate any such tax liability. A small understanding of facts here can save us lacs of rupees in terms of tax savings in a single transaction.

Here are some facts that you should be aware of :

1) All tax exemption provisions for capital gains through sale of property (as listed in the subsequent points) are applicable only if you have incurred Long Term Capital Gains. There is no tax exemption possible for Short Term Capital Gains. (Refer Preserve your Property Gains ).

2) Re-invest in buying new property : If you invest part  / full amount of your capital gains in a new residential house property, then you are 100% exempted from taxes on Capital Gains. Remember that this re-investment needs to be done between the time period of either a year before or two years after the sale of the original residential property.

3)Re-invest in construction of a new property : The same benefit as given in pt 2 above is also available if you invest your capital gains (either partial or full) for the construction of a new residential property. Remember that the new property construction has to be done within 3 years of the sale of the original house property.

4) Partial Capital Gains Re-investment : If you invest, lets say, 70% of our capital gains, you get tax exemption on the 70% part of your capital gains. You will have to pay long term capital gains on the remaining 30% gains.

5) The newly acquired residential property (as in pt 2 above) has to be held for at least 3 years. If you sell the new property in less than 3 years, then you will have to pay tax on the entire capital gain that was tax exempted earlier and also the applicable capital gains on the newly acquired property.

6) You can also save taxes on capital gains by investing in specific bonds issued by National Highway Authority of India (NHAI) and Rural Electrification Corporation. This investment needs to be done within a maximum of 6 months of the transfer of the original house property. Also, these investments in bonds cannot exceed a maximum limit of Rs. 50 Lacs. Just like re-investment in property, the investment in bonds has to be held for a minimum period of 3 years.

7) While you are doing these re-investments, some of which may take time to materialize (may be even years), where do you hold your capital gains in that interim time period which tells the government that you intend to reinvest these capital gains within the time frame given in all the above options, and are hence not liable for taxes? The right procedure for that is to open a separate CGAS account (Capital Gains Account Scheme). You need to put all your capital gains during a financial year into this CGAS account (which can be opened with any bank) before the end of the financial year in which you did the sale of your property. The amount deposited is deemed to be earmarked for purchase or construction of a new residential property, and is hence not taxable during that year.

In nutshell, never sell a property for capital gains in less than 3 years. 

Once you have crossed the 3 year threshold, there are so many options available to re-invest your capital gains to avoid taxes.

Cheers

Manoj Arora

Related Post Topics:

Home

Tax Rebate

Income Tax

Financial Freedom

Preserve your Property Gains

 

Real Estate, as an investment tool, normally rewards you with enough annual returns, sometimes in line with what stocks can provide you. Though Stocks / Equity still remain the best choice considering relatively smaller investment, liquidity and extremely high return potential, Real Estate (in developing countries) remains the 2nd best option.

Though the upcoming book (From the Rat Race to Financial Freedom) would guide you on how to truly invest in real estate, there are a few tips you should keep in mind when you are selling your real estate investment to book profits or to subsequently invest your profits somewhere else. Knowledge of certain rules and laws would only help you to preserve your gains that you realize through this investment tool.

Short Term Capital Gains

If you sell your property within 3 years (36 months) of the date of acquisition, your property would qualify as a Sort Term Capital Asset (STCA) and the gains that you realize out of this sale would qualify as Short Term Capital Gains (STCG)

Here are the salient taxation laws for Short Term Capital Gains

1. Any STCG is considered as your taxable income for that year and should be included as your income when you file your income tax returns.

2. Since the profits are qualified as income, they are taxed as per the income tax slab applicable for you for that financial year.

3. This is the least efficient means of getting returns from real estate as an investment. One should consider this option only in case of emergency need of funds.

Long Term Capital Gains

If the holding period for your property exceeds 36 months,such property qualifies as a Long Term Capital Asset (LTCA) and the gains realized from its sale as Long Term Capital Gains (LTCG)

Here are the salient taxation laws for Long Term Capital Gains

1. LTCG is taxed at a flat rate of 20% after indexation of cost

2. Indexation of cost is very important and has a significant positive impact on you wrt the tax liability. 

3. Indexation of Cost typically means that for calculation of your gains, the cost of the house is uplifted by the inflation index for each year till the sale is made. So, your net indexed gain is less than the actual gain, resulting in reduced tax liability.

It makes lot of sense to wait for more than 3 years if you are selling your property for investment gains. Let us understand in some more detail through a simplified example.

Example:

Let us assume that you bought a house with the following details

Cost of Purchase : Rs. 20 Lacs

Expenses on improvement : Rs. 5 Lacs

Total Cost : Rs. 25 Lacs

Selling Price : Rs. 40 Lacs

Case 1 : House is sold within 3 years

Applicable Gain : STCG

STCG : Rs. 40 Lacs - Rs. 25 Lacs = Rs. 15Lacs

Taxable Income : Rs. 15 Lacs

If you are in the highest tax bracket (30%), your total tax : Rs. 5 Lacs.

Case 2 : House is old just after 3 years

Applicable Gain : LTCG

Indexation adjusted cost of purchase :  Rs. 33 Lacs (assuming approx 10% inflation every year for 3 years)

LTCG : Rs. 40 Lacs - Rs. 33 Lacs = Rs. 7 Lacs

Taxable Income : Rs. 7 Lacs

Your total tax (flat 20%) : Rs. 1.4 Lacs.

Summary : 

1) You saved Rs. 3.5 Lacs on taxes just by waiting for 3 years to pass by.

2) Education cess is applicable in both cases of LTCG and STCG, though not considered in the above example, just for the sake of simplicity.

3) Note that money spent on house improvement is also included in your cost, and helps you reduce your tax liability.

4) There are laws that help you save or re-invest the LTCG, thus avoiding any tax at all. That topic would in the scope of the next post.

Cheers

Manoj Arora

Related Posts

Understanding Mortgage

How to decide whether you want to pre-pay your home loan

Understanding Mortgage

 

^{Understanding mortgage and few other key terms and concepts around it will help us understand more on this critical aspect of money management in our lives. So, lets go..}

In layman's definition, a mortgage is a loan to finance the purchase of one's home. This is clearly the biggest debt that you would ever get into in your life.

Literally, The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.

Your home is a collateral for such a loan. Collateral means anything that you pledge as security for re-payment of your home loan. For mortgage, your home is the collateral. Remember that the collateral is subject to seizure on default. It is logical and very obvious that the bank would not give you a loan which is more than the value of the collateral.

To repay the debt (loan), you make monthly installments or payments that typically include the following:

(1) Principle: The principal is simply the sum of money you borrowed from the bank or financial institution to buy your home. Before the principal is financed you can give the lender a sum of cash called a down payment to reduce the amount of money that will be financed by the bank.

(2) Interest: Usually expressed as a percentage called the interest rate, interest is what the lender charges you to use the money you borrowed.

Principle and interest comprise the bulk of your monthly payments in a process called as amortization. Amortization is a process which reduces your debt (principle) over a fixed period of time. Over this period, which can be generally anywhere between 10 to 30 years, the principle component of the loan (the original loan) would be slowly paid through Equated Monthly Installments (EMIs). With amortization, your monthly payments are largely interest during the early years and principal later.

(3) Taxes: The taxes are the property taxes your community levies based on a percentage of the value of your home. The tax is generally used to help finance the cost of running your community, say to build schools, roads, infrastructure and other needs. You must pay property taxes even after your mortgage is paid off.

(4) Insurance : Though this is optional in some regions of the world, you might definitely want to consider one or both of the following insurances to safeguard your home:

a) Home insurance This covers your home and your personal property against losses from fire, theft, bad weather, natural calamities and other causes. Even if you pay cash for your home, you should buy home insurance unless you can afford to repair or rebuild your home if it's damaged or destroyed. 

b) Life Insurance - You should consider buying life insurance if you think that it would be financially challenging for someone in your family to continue to pay the EMIs for your home in case of your death. Typically, you should go for a term plan which gives you maximum returns with minimum investments.  

Foreclosure or Repossession 

The possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan. Without this aspect, the loan is arguably no different from any other type of loan.

Types of Amortized loans 

Across the globe, there are two types of mortgage loans available:

1. Fixed rate mortgage (FRM)

The interest rate charged by the lender is fixed at the time of signing the mortgage contract and does not vary irrespective of prevailing market and economic conditions

2. Adjustable-rate mortgage (ARM) 

This is also known as a floating rate or variable rate mortgage. In some countries, such as the United States, fixed rate mortgages are the norm, but floating rate mortgages are relatively common in other countries like India.

Adjustable rates / Floating Rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, for example, 0.5% to 2% lower than the average fixed rate.

Mortgage underwriting 

It is the process a lender uses to determine if the risk (especially the risk that the borrower will default) of offering a mortgage loan to a particular borrower is acceptable. Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral (In the UK they are known as the three canons of credit - capacity, collateral and character).

To help the underwriter assess the quality of the loan, banks and lenders create guidelines and even computer models that analyze the various aspects of the mortgage and provide recommendations regarding the risks involved. However, it is always up to the underwriter to make the final decision on whether to approve or decline a loan.

Getting involved with real estate, and hence with mortgage loans, is a critical aspect of financial freedom, even after you are financially free.  In fact, my book "From Rat Race to Financial Freedom" will explain you how you can leverage the mortgage loans to maximize your annual returns.

Happy mortgaging till then !!

Cheers

Manoj Arora

Related Articles

How to decide whether to Pre-Pay your Home Loan

Know more about Home Loans Pre-Payment

 

 

How to decide whether to Pre-Pay your Home Loan

What is a Home Loan

A home loan is a useful financial vehicle that gives birth to many a middle class dream. Home loans are one of the biggest commitments from common man’s perspective. With long tenures these loans, sometimes outlive the individual.

What is prepayment of Home Loan

There is one option through which an individual can bade adieu to his loan and become the complete owner of his/her house. Loan prepayment is an option where the person pays a sum higher than his regular installments to reduce the principal amount of his loan. If the prepayment amount is high enough it can also reduce the tenure of the loan.

Should i pre-pay my home loan or not?

Well, this seems to be confusing a lot of my friends...more than what i expected. Any such decision regarding pre-payment of home loan would depend on a simple Return On Investment (ROI) Analysis. (To know more about ROI, please refer to the post :Do you know your Return on Investment (ROI) )

To put in simple money terms, if you have an amount X available with you which you want to use for loan pre-payment, you must consider this as a simple investment decision. You need to look at all investment options which can maximize the return on this X amount over a defined period of time,  and one of the additional options you should consider now is "Loan Pre-payment"

Options to consider before taking a decision

Lets consider some of these options as an example

Option 1 : Pre-pay the current home loan

If you go for this option, you need to calculate how much money do you save on principal+interest by prepayment. So, if you pay X amount as prepayment, then depending upon the interest rate that your bank is charging, what is the interest (lets assume Y1 amount) that you will save till the end of the loan tenure (lets assume this to be 10 years). Lets assume that you arrive at a figure of a total of say Z1 (where Z1=X+Y1) So, this is option 1 where you invest X amount today and get back (or save) Z1 after 10 years. So, Z1 becomes your return in  Option 1 after 10 years.

Option 2: Invest amount X in equity or debt funds

If you have been calculating your ROI through each mode of investment over the past few years, and lets say you can get an average 12% annualized returns on your equity investments (Stocks, MFs etc), then in that case, X amount invested for 10 years @ 12% compounded rate yields an amount Z2. So, Z2 becomes your return in Option 2

Option 3 : Invest in another Real Estate

This is another option that people look at. Instead of prepaying the current home loan, people tend to invest in new real estate property. Again, depending the likely returns on real estate in the specific location where you are investing, you would need to get a reasonable idea for the likely returns and arrive at an amount Z3, which would be the market value of the real estate investment after 10 years. In India, the chances are that those would still be higher than the returns that you are getting through Option 1.

Depending on what gives you the max returns out of Z1, Z2 or Z3, you can take an informed decision. 

The book "From Rat Race to Financial Freedom" gives details on how to invest in real estate and at what stage of your financial freedom life cycle.

Related Posts:

1. Do you know your Return on Investment (ROI)

2. Amazing Power of Compounding

Cheers

Manoj Arora

Know more about Home Loans Pre-Payment

Introduction

This particular post (Know more about Home Loans Pre-Payment) is to specifically make my readers aware of various key terms and rules concerning home loan and home loan prepayment. The next post tomorrow (How to decide whether to Pre-Pay your Home Loan) would talk in detail about how to take a decision whether to pre-pay the home loan or not?

What is a Home Loan

A home loan is a useful financial vehicle that gives birth to many a middle class dream. Home loans are one of the biggest commitments from common man’s perspective. With long tenures these loans, sometimes outlive the individual.

What is prepayment of Home Loan

There is one option through which an individual can bade adieu to his loan and become the complete owner of his/her house. Loan prepayment is an option where the person pays a sum higher than his regular installments to reduce the principal amount of his loan. If the prepayment amount is high enough it can also reduce the tenure of the loan.

What is prepayment penalty

Many banks would charge you a loan prepayment penalty if you decide to pay a sum of amount to the bank that is more than your Equated Monthly Installments (EMIs). This always sounded very strange to me - one, i pay more money to the bank and second, i am penalized for the same. Well, banks may have their own reason to do so - including the fact that they lose out on a portion of the interest they were supposed to earn.

Does pre-payment penalty still exists?

Partially, yes. Pre-payment penalty has been abolished on specific types of loans. Several factors contributed to the prepayment penalty being abolished, with concerns regarding the various practices by banks being the primary factor. While old customer was charged higher interest rates, the new customers were lured often, with lower rates. This meant loyal and old customers were punished with higher rates. Abolishing prepayment penalty meant, the old customers could move to other banks and enjoy lower interest rates.

Fundamental Rules regarding Pre-payment penalty

1) On 9th October 2011, the NHB (National Housing Board) had given a directive to scrap penalty on pre-payment of housing loans. All the 54 housing finance companies had to abide by the directive.

2) The pre-payment penalty is abolished for floating interest rate loans only. This enables the borrower to either prepay his loan or move his loan to other housing finance company that offers better terms by refinancing the old loan.

3) The pre-payment penalty on fixed interest rate loan is not abolished. However, if pre-payment is done with own sources, then the penalty is not levied. "Own sources" here refers to other than borrowing from a bank or a financial institution.

The book "From Rat Race to Financial Freedom" would talk in detail about Home Loans and how to effectively invest in real estate to speed up your goal of financial freedom.

Cheers

Manoj Arora