Tax deduction in Real Estate

Tax saving opportunities in real estate

Real Estate, it is the very common and traditional investment avenue for the investor. In last 4-5 year, it has performed fairly well against most of asset class. Most of us believe that it is safe and quick return generating asset. In realty, before any investment you should be aware of your tax benefit and tax liability both.

For example, if an individual sell the house within 3 year from purchase, the earlier claimed tax benefit completely reverse and you have to pay the short term capital gain tax as per your income tax slab. So in case if you sell property and think of 50% gain then kindly consider the tax liability also before selling your property. It is applicable to all type of properties whether self occupied property or let out property (LOP) or deemed let out property (DLOP). Let out property (LOP) means that property from which you are earning some income and DLOP means that property has not yet been let out for rent. These tax rules are not applicable on farm house as it is considered as an agriculture land.

If you have property from which you are getting rent income is consider as LOP. For calculate the tax liability, we have to first calculate the net annual value of the property. The following steps help you to calculate the net annual value (NAV) of the property:

Step 1: Compare the municipal value and fair rent. Fair rent can be obtain

            from the rent of properties under similar category. The higher value

            can be used but it should not exceed than standard rent. Standard

            rent fixed as per guideline of the Rent Control Act

Step 2: Actual rent value received from property

Step 3: Choose the higher value from the above 2 steps

Step 4: Calculate rent amount for those months when property was not

            Rented

Step 5: Calculate the difference of the value of step 3 and step 4. It is your

            Gross Annual Value (GAV).

Step 6: We will get the Net Annual Value (NAV), by deducting the paid and

            due municipal taxes from GAV.

In case of multiple properties, the highest GAV value property is considered as self occupied property.

Available tax deduction:

• The principal amount you pay for home loan can be also claimed under section 80(c) within the limit of Rs 1 lakh.

• Under Section 24(a), taxpayer can directly claim the 30% of NAV of the property as a tax deduction for maintenance of the property regardless whether the amount has been spend or not for the maintenance of property. It can be claim for LOP and DLOP property not for self occupied property.

• Under Section 24(b) interest paid for borrowed home loan, taxpayer can claim entire interest in case of LOP and DLOP property. In case of self occupied property there is limit of Rs 1,50,000 for tax deduction interest paid for borrowed home loan. This deduction can be claimed after complete construction of the property.

It is the vast subjective subject. For more detail and any other query related investment, you can contact me through my email

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Common mistake during tax planning

Common Mistakes during Tax Planning

All of us want to save tax more and more or in fact no one want to pay tax happily. Most of us don’t plan in the beginning of financial year. We awake for it when our office accountant remind us or our CA. The main reason behind wrong tax planning is to wait last moment of financial year (Feb-March) closing. In the hurry of tax planning in last moment we often ignore the essential element of financial planning like our financial goal, risk appetite, income and investment product.

If you have ever felt that during Jan to March we will get so many telephone calls from insurance company for ULIP (Unit Linked insurance Plan). ULIPs are insurance cum investment product and have many charges which are not mostly disclosed by an agent. In fact you should not mix your insurance with investment, one of the golden rules of financial planning. In these products, you don’t get adequate risk cover so your insurance planning spoil and you get raw deal in the hurry of tax saving.

We often do not optimize all tax saving options. Many of us only stuck with Section 80(C). There are also so many other options exist which you should explore with the tax expert. There are many other relaxation of tax like medical treatment of dependant handicapped, loan for higher study, suffering from specified diseases and many more.

If your age, income and risk appetite allow you to some degree risk you must invest in ELSS mutual fund. These funds come with 3 year lock in period and worth for invest. It is the good option for tax saving. If we keep in mind the mentioned things in this article, we can make optimal financial planning.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Do you know about your HRA exemption.?.

How to get benefit of HRA in Tax Planning..?

For a salaried individual, HRA (House Rent Allowance) is important part of the salary slip. In our taxation rule, there are 3 type of tax deduction. First is the amount paid as a rent, the second is amount paid as principal amount of home loan and last is interest paid on home loan. Most of time, they don’t know how to calculate the exempted amount of HRA. For this they totally depend on their office accountant or friends. I am getting many friends and client call about HRA calculation. So today, I am going to discuss in detail about the HRA.

There are many doubts in the people’s mind about home loan and home rent exemption. I am taking one by one those doubts. The most common doubt that is HRA exemption applicable for both salaried individuals and self- employed. The answer is HRA benefit is not available to self-employed professional, as they don’t earn salary but they can claim benefits of house rent expenses according under section 80GG with subject to certain conditions.

The other most asked query is can anyone take both HRA and home loan benefit. The answer is yes. If you are paying rent, you can claim HRA benefit and if you are earning rent income from in the name of your property you can also claim the interest benefit. There is no direct connection between HRA and home loan tax benefit.

Some common situation faced by salaried person:

·         If the person live in own house then he cannot claim HR exemption. If he is paying home loan and paying EMI then he can claim tax benefit on principal mount and interest paid portion.

·         If the person has bought under construction property and staying in rented home in the same city then he can avail tax benefit of HRA and principal paid but cannot get benefit of interest till construction completed. Once construction complete, he can claim all interest paid during construction in 5 equal installment in the next 5 year from complete construction year.

·         If the person has bought home in other city and stayed in rent in the other city then he can claim HRA exemption and will get benefit of paying home loan of principal amount and interest paid.

·         If the person is paying home loan for home which is ready for occupation but not residing in it due to some reason like work place far away then he can claim tax exemption on HRA and tax benefit of home loan including principal and interest. You have to still pay tax on notional rent income even if your home remains vacant during the year. If you are getting rent then the rent income will add in income from other sources and taxable according to specific rule.

How to calculate the HRA exemption amount:

Lets take an example to understand how to calculate HRA exemption amount. Mr. A gets basic salary Rs 50,000 and HRA Rs 30,000 per month. He resides in mumbai and pays rent Rs 25,000 per month. Calculate the tax exemption amount of HRA?

There are 3 conditions and the least amount of these 3 is eligible for HRA exemption:

(A)  Actual HRA received: 30,000

(B)  50% of basic salary as he resides in metro city: 25,000 (For non-metro city it is 40% of basic salary)

(C) (Actual rent paid) - (10% of basic salary) it means (25,000- 10% of      50,000) = 25000-5000 = 20,000

According to the rule the least of the above 3 figure is eligible for tax exemption so exempted tax mount of HR is Rs 20,000 and taxable HR 30,000-20,000= 10,000.

You can pay rent to your parent and can still claim HRA exemption but in case of spouse you cannot claim HRA benefit.

One more important thing to remember, you have to submit the rent slip signed by owner as rent proof to your employer.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

One more Single Premium Insurance cum Investment Plan

One more Insurance cum Investment Plan

I have came across one article in business standard which I want share with all of you.

Life Insurance Corporation's (LIC's) 'Jeevan Sugam' is a single-premium endowment product. Since the product gives death benefit (sum assured) that is equal to 10 times the premium paid, it will qualify for tax exemptions under Sections 80C and 10(10D) at entry and exit.

Along with LIC, Star Union Dai-Ichi has a similar product to offer, which is giving a higher guarantee and a better rate of interest than LIC on Rs 1 lakh single premium paid by a policyholder. Both are single premium endowment products. The insurers have launched this products under the endowment umbrella to give guaranteed returns to customers. Additionally, there are enough single premium products available in the market which fall under the ULIP category.

The products are available to people between the age group of eight and 45 years. According to experts, individuals will have to undergo a medical test before buying this product.

Both the products are close-ended and will be available for purchase only till the end of this month. While both the products are giving a death benefit equal to 10 times the premium paid, their maturity benefits will differ. Ten years is the policy tenure.

According to the data available, if a person buys Star Union's 'Dhan Suraksha Platinum II', he or she will get a maturity benefit of Rs 1.81 lakh after 10 years (policy tenure) against Rs 1.77 lakh in LIC's 'Jeevan Sugam'. Reason: The difference in their returns is due to the different mortality tables used by both insurers. Experts say since LIC is deeply rooted into rural areas where risk to life is higher, there are chances their premium rates are higher due to that.

Pankaj Maalde, head-financial planning at Apnapaisa.com says, in the long run, Star's product will return better than LIC's because after 10 years Star Union's product will give an IRR (internal rate of return) of 5.8 per cent, compared to 5.6% returned by LIC.

Hence, one shouldn't buy these products for investment sake because their returns from the guaranteed portion are not attractive. If one is looking at good returns, they can consider investing in a Public Provident Fund (PPF) and bank fixed deposits which guarantee better returns.

While insurance is not for investment, it's still better to weigh your options in case you plan on buying one. Hence, it's better to compare insurance products, their premiums and benefits offered before buying them. Financial planners say it's an investment product and people left with no other tax-saving avenue only should make use of such products. LIC and Star Union are offering an additional benefit of 4.5 and two per cent if your maturity sum assured exceeds Rs 5 lakh. In other words, Star's benefits here is less compared to LIC.

Star Union has clearly mentioned in the product details that the product will give a tax break on the plan benefits received, under Section 10 (10D). Whereas, LIC has not mentioned this on their website.

While R R Dash, zonal manager, LIC confirms the maturity amount from this product is tax-free under Section 10(10D), we have still refrained from mentioning it, in case tax laws were to be changed anytime this year.

In the case of Star Union, the maximum amount of loan that can be availed is 75 per cent as against 60 per cent in the case of LIC. That quantum will be available as the surrender value at the time of taking the loan.

If the policy is surrendered on or before the second year is completed, the insurers will return 90 per cent of the single premium paid. Whereas, in case the LIC policy is surrendered in the first year itself, then the company is returning 70 per cent, compared to 85 per cent in case of Star Union.

While single premium products are expensive compared to pure protection plans, it makes sense not to mix insurance products with investment products. While one has to make regular annual payments in protection plans, it makes sense, as the death benefit offered by life insurers is much more than such investment-based products. If one is looking at such products purely for tax-saving purpose, then he or she can also consider tax-free bonds giving returns in the range of 7 and 7.5 per cent. Additionally, people ready to take some equity exposure can invest in an equity-linked saving scheme.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com