THE WORLD AT YOUR FEET - High income, low tax... House that!





Buy that new penthouse, reap lakhs in tax savings. Here's how the math works

The upside of being a `high-net-worth individual' (HNWI) is that you get a fatter pay cheque than most people.
The downside is that a big chunk of it will be taken away by the taxman. But there are ways of getting around that; in fact you can save a lot of tax by buying a house -as long as you let it out and not live in it.

Kuldeep Kumar, executive director of PricewaterhouseCoopers, says that's because, under Sec tion 24 of the Income Tax Act, you are al lowed deduction of the entire interest payment on your home loan from your taxable income -provided you club the rental income from the house with it.

After the new Budget, home buyers are allowed a deduction of Rs 2,00,000 on interest payment of their home loan. But no such limit exists if you can show your purchase as an investment, and not for personal use. The tax benefit is huge, says Vivek Jain, a senior chartered ac countant. If you are wonder ing how, the math is simple: with interest rates at around 10% per annum and rentals from a residential property hovering around 3% of capital value even in the metros, your actual outgo amounts to about 7% every year. This "net loss" is what you can rightfully claim as deduction from your taxable income.

LOSS IS GAIN

Here's how the calculation works out. Let's say you have an income of Rs 1.20 crore per annum, putting you in the 33.99% tax bracket. You buy a house worth Rs 3.30 crore for which you pay Rs 30 lakh up front and get financing of Rs 3 crore from a bank. At 10% interest rate, your EMI will be Rs 2,89,506. In the first year, your total payout will be Rs 34,74,072 -Rs 29,77,656 as interest payment and the rest towards repayment of principal. Going by market trends, your annual rental income would at most be Rs 11,50,000, or 3.5% of capital value. After deducting 30% as maintenance expense, your net taxable rental income will be Rs 8,05,000 (70% of 11,50,000). Deduct this from the interest amount (Rs 29,77,656) and your "net loss" stands at Rs 21,72,656. This amount will be deducted from your taxable income, reducing your tax liability by as much as Rs 7,38,486.

RETURNS OF RENT

With part of EMI being used to pay the principal, the interest burden will decline with each year; the second year, it will be reduced to Rs 29,25,675.
With rental income rising by , say, 5% during the period, the net loss will come down to Rs 20,80,425 and you get to save Rs 7,07,136 as tax in Year Two.
Interest amounts will fall further but a simple calculation shows that even if rentals keep increasing at 5% CAGR, your income from rent will exceed your interest outgo only in the 15th year.

FLOOR POWER

Buyers who are yet to get possession of their flat stand to gain as well, says Kumar.
The entire accumulated interest payout during the construction period can be claimed as deduction over the next five years once possession is taken.

After 15 years, you can sell the house and reinvest the money in a new one. Of course, you can always invest in more than one property and save even more tax. All it takes is an even fatter pay cheque.