Renting a House – Know Tax Implications

A couple of days back, Rakesh had a talk with Aditya about buying out his rented flat, as his landlord was shifting to Australia to stay with his son now. Since the deal was a total steal, Rakesh was all excited to close it as soon as possible and hence, had already talked with his bank for a housing loan. Read the conversation here where they also talk about how housing loan helps you save tax. Having got educated with respect to the tax benefits given by his housing loan for personal use, Rakesh was now all curious to know what difference did it make it the house was going to be let out. Unable to hide this curiosity, he went to Aditya’s office right after getting back from bank.

“Hi, Rakesh. Good to see you here. So, when are you getting the deal executed? I am so excited to have a cup of tea in your own house.” Aditya was equally excited about the deal.

“Housing loan formalities are all done with. The purchase should close next week. We are equally excited to host you in our new house.” Rakesh informed him about the current status of the transaction.

“By the way, I was just wondering if the tax benefits will get higher if I opt to rent my house, instead of using it for self-occupation. Not that I am planning to execute such a thing, but just the curious me wanted to know.” Rakesh added.

“Well, I know how hard it gets sometimes to put down the curiosity quotient within us. Let me try my best to answer your question. Until the year 2016-17, the deduction towards home loan interest was given on the basis of actual interest charged by the bank during the year, if the house was rented out. However, from the year 2017-18, the loss from house property due to interest has been limited to Rs. 2 lakh, be it towards a self-occupied house property or a rented one.” Aditya tried to cover all the points in one go.

He further added, “While this limit is for all the house properties taken together, you can save t, as well as the loan,s well as the loan is taken in joint name, as the ceiling limit of Rs. 2 lakh will be on individual basis.”

Aditya thought that Rakesh’s queries were all sorted now, but this wasn’t the case to be.

“And what about the rental income so received? Is it fully taxable?” Rakesh was still on learning mode.

“While the rental income is indeed taxable, there are certain deductions allowed for that as well. Recognising the fact that property tax is paid by the owners, 100% deduction is allowed from the rental income in respect of property tax actually paid by the owner. Further, Govt. has also a maintenance standard deduction towards repairs and maintainence of the house property. So, you deduct this 30% from the net amount i.e. rent minus property tax so paid and then offer the balance 70% for tax. In a nutshell, your taxable income from house property shall be your rental income minus property tax paid minus 30% standard deduction less interest on home loan.” Aditya summarised the tax provisions in a nutshell beautifully.

The smile on Rakesh’s face was the true indicator of the simplicity Aditya used to explain the provisions.

“Even while a cup of tea at your place will be possible next week only, let’s have one now.” Aditya smiled.

How Housing Loan helps you save tax?

Chennai Super Kings (CSK) won the Indian Premier League last month in a great fashion and this win was indeed special as it came after 7 long years. Aditya and Rakesh had been having a great time watching the weekend IPL matches together. However, this Sunday, it was a bit different. Rakesh seemed in a bit of mood while they were having tea together.

Rakesh was always a happy and smiling chap and Aditya too sensed something wrong when he saw Rakesh like that.

“What happened, Rakesh? You seem a bit upset.” Aditya was concerned.

“Nothing really. Just that my landlord has asked me to vacate the house in a month as he is planning to sell. He is selling off the property as he is going to Australia to stay with his son. He has even offered me to buy that flat for Rs. 50 lakhs, but I don’t have enough savings. I am just worried about finding a new rented house.” Rakesh and Aditya were friends for a long time and Rakesh was also comfortable sharing his life with him.

“Just Rs. 50 lakhs? It’s a great steal at this rate, Rakesh. The market value of this flat is at least Rs. 70 lakhs. Just go for it. And as regards funding the purchase is concerned, go for a housing loan.” Aditya immediately jumped off the seat.

“And you know what, this housing loan will help you save taxes as well.” Aditya further added.

“Oh really? How housing loan lowers my tax burden?” Seeing some tax advantage, Rakesh was now seriously considering the option to buy the flat after taking a housing loan.

“With a view to encouraging people to have their own house properties, Govt. provides tax deductions on the interest on housing loan as well as the principal repayment of the loan.” The financial advisor within Aditya was now active.

“That’s nice. How much tax savings can be expected?” It seemed like the idea had really pleased Rakesh and he was in no mood now to leave the offer to buy the flat.

“As per the present tax laws, you can save tax against the interest amount that you pay on such a property. Importantly, even if the property is self-occupied, you can avail of this benefit. Since you will stay in the house, interest amount of up to Rs. 2 lakhs can be deducted from your taxable income and hence you can save up to Rs. 62,400 of tax. In fact, if you have a co-borrower on the home loan, he or she can also additionally claim the deduction of up to Rs 2 lakhs from his or her taxable income.” Aditya was using his financial acumen to get him more interested.

“And the tax benefit not only stops with this. The principal amount of loan repaid during the year also gets deducted from your income as per Section 80C of the Income Tax Act, 1961 once you take the possession of the house. However, this benefit is part of the overall tax saving options such as ULIPs, PPF, EPF etc, under that section and the ceiling thereon is Rs. 1.50 lakhs for all the tax savers in aggregate. In fact, in the first year of the loan, you can also claim your expenses towards stamp duty and registration of the house under Sec. 80c.” Aditya added to his earlier statement.

“Any saving is indeed a good saving. While I was worried about finding a new flat on rent, you have given me a nice reason to think for something better.” Rakesh was much excited now.

“So, when are you inviting me for a tea in your own flat?” Aditya quickly stole the moment and it ended up with smiles on both the faces.

How to Check your CRIF Credit Score?

Last time Rajesh and Aditya met, they had a good session discussing the basics of the credit score. They were again together to enjoy the one-day IPL Match between CSK and KXIP. CSK won this match comfortably by 5 wickets but Rajesh seemed much happier. Digging a little, Aditya came to know that ABC bank had finally sanctioned Rajesh the housing loan after his credit score was traced from another credit bureau.

I owe you a party, my friend. It’s all thanks to the basics you made me aware of the credit scores. I went to the bank next day and possibly due to my discussions about the credit score, the banker searched more into my credit history. I was pleasantly surprised when he said that while he could not fetch my credit history from one of the credit bureaus, he could find my credit history and credit score in CRIF High Mark database. With a score of 755, it was easy thereafter.” Rajesh said all this in one go. He was not able to hide his excitement.

Aditya was happy to hear about Rajesh’s housing loan sanction.

“Oh great, a good score indeed. CRIF score is calculated by CRIF High Mark, India’s leading credit bureau, which has the largest credit bureau database of individuals and supports millions of lending decisions every month.”

But there must be a way to check this score by myself too. I must keep a regular track of my credit score now.” As always, Rajesh was excited about the new thing he was made aware of.

Aditya was happy to guide him again. It seemed like he had been waiting for this question since long.

Here are the steps to get your free CRIF Credit score:

  1. Open CRIF portal, http://cir.crifhighmark.com.
  2. Click on “Get Your Score Now” button.
  3. A pop up will open asking your email address for communication purposes. Enter your email address here to proceed.
  4. The next window will ask you about few details which will help CRIF High Mark identify you amongst the complete database. The details as may be asked are name, date of birth, mobile number, address and PAN or Aadhaar number.
  5. Once you review and submit the information, you will be asked one security credit question, which will be based upon the records so traced basis the information furnished above.
  6. If you are able to answer the security credit question correctly, your CRIF credit report is available to you for download.

You should also be happy to note that everyone is entitled to a free credit report and score from CRIF High Mark once every year. So, get your credit report without paying any charges.

Oh, that is good. I will definitely download my CRIF High Mark credit report once I get back home.” Rajesh was happy to again learn something new.

It’s time to enjoy the tea now. The rainy weather is calling pakodas to my kitchen now. I will not let you go before we enjoy that.

But yes, how could bank not find my credit report with one credit bureau while getting the same from another credit bureau.” Rajesh was in no mood to let Aditya go.

We always have a good time when we meet over the weekends. So, let’s keep this question for then.

Rajesh and Aditya were smiling now.