Tax benefit on Land purchase loan

July 14, 2009

Q. I am buying a residential land in sector 9 in Gurgaon. I want to take home loan from a bank. Though I am not sure if I would get income tax benefit on this or not. I am getting different information from different people. Sombody is saying that if I take Land + Construction loan then I would get IT rebate. But I am not clear if I would get rebate on complete loan or only loan component which is given for construction. – Brajesh Jain.

Ans. Dear Brajesh, Plz. note in order to avail Income Tax benefit on home loan, the construction should completed within 3 years from the date of disbursal of home loan.


Now considering ur case, following options r there for u.

1. Land purchase thru Loan & construction from own money – In this case, although the loan was taken primarily to purchase land still u can avail the tax benefit on this loan if u have constructed ur house on this land within the 3Y period.

2. Lan purchase as well as construction both r from loan – In this case again u can avail tax benefit on total loan condition the construction is completed within 3Y.

Plz. note as the construction `ll take time to complete, the interest paid by u in between on land loan or land + construction loan `ll not be available for tax benefit in the same FY. But u can carry over the same & avail @ 20% each year from the FY of completion of construction.

Thanks

Ashal …


Understand, Then Invest

July 12, 2009

It was many years ago that I first read the book Small is Beautiful by the economist E.F Schumacher. It’s not a popular book in business circles. Shumacher’s concepts of getting by with the least possible and smallest possible set of resources seem outlandish to a certain audience. To most businessmen, ‘enoughness’ seems to be an idea more suited to a hippie commune from the sixties than to the world as they see it functioning.

This may seem like a long jump, but I personally believe that for a non-professional investor, a derivation of Shumacher’s approach would work very well an investment philosophy. This is something that I would call the ‘Simple is Beautiful’ approach. It could also be called ‘Do Less to Do More’ approach.

This approach is based on my belief, borne out of many years of interacting with investors, that far more people go wrong by trying to do much than by doing too little. In personal investments, the solution is not to do a lot, but to do only the minimum possible.

The ‘Simple is Beautiful’ approach means sticking to some basic time-tested principles; by investing in the minimum possible number of securities and by taking the fewest possible actions. In the last couple of decades, the culture of investing (and of finance in general, and perhaps of all business) has shifted towards a worship of complexity for its own sake. More and more people assume that any investment methodology that doesn’t involve mysterious formulae, and arcane ratios and elaborate charts couldn’t possibly deliver the goods. The truth is the exact opposite. This complexity is just smoke and mirrors erected by a priesthood in order to create a need for their services.

How would such a simple approach work in practice? Here’s one example, which could well serve as the recipe for the perfect financial plan. You should keep all the money that you might possibly need for at least the next five-to-seven years in a safe fixed-income investment.

The reason is obvious-this is the money that must always be on call. Only safety matters, nothing else. Longer term investments should be invested in a small number — three to four — of conservatively run equity funds with a good track record. Remember, the five-to-seven-year time horizon is a sliding window. Money should be moved from equity to fixed income as its date of usage comes near. The investments in equity should be gradual — shoving money into equity-backed investments in one fell swoop when things get hot is courting disaster, but I suppose everyone should know that after the experience of the last couple of years.

Is this an example the best possible plan? Well, that depends on your definition of best. I think this plan is the best one because its basic principles require no further understanding. It’s optimised not for returns, but for the best combination of comprehension and returns. It’s very important to do only those things that we understand ourselves.

In personal finance, there are few issues that are as full of obfuscation, such as insurance. Few financial products that are intended for individuals are as full of complexity as modern insurance products. However, keeping the ‘Simple is Beautiful’ principle in mind, it isn’t difficult to cut through this thicket.

Here’s what you need to do. Make a liberal estimate of how much money your family will need if you should fail to wake up tomorrow morning and buy the cheapest term insurance you can find. Do diversify your insurance across LIC and two private insurers — one is no longer confident of who’s going to be solvent tomorrow. You should buy lots of term insurance, but never even think of buying any other product from an insurance company. In their mixed savings+insurance products like ULIPs, the huge commissions and obfuscated expenses they charge will kill your real returns.

One important component of the ‘Simple is Beautiful’ approach is to somehow avoid having to react to market ups and downs. This is a major advantage of the kind of approach to investment that I’m describing.

If you have an investment plan needs tailoring to suit the season then it’s useless to begin with. Almost by definition, the only useful approach to investing is one that does not need to change in reaction, or worse, in anticipation, of events. The approach that I describe would be just as good during the lows of March 2009 as it was at the highs of January 2008. Or in fact at any other point of time in the past decades. The ‘Simple is Beautiful’ approach is structured around your life, not that of some investment market. In this approach, you change your financial plan when something happens in your life, not in the stock market.

One characteristic of this approach is the emphasis on understanding things yourself rather than being dependent on some expert who is pushing his own agenda. This goes against the grain of modern financial industry, but understandability is a more important characteristic of any investment than high returns or anything else. Far more people get into trouble by putting money into things that they don’t understand rather than by earning a little lower return.

Does that mean that experts are not needed at all? Not really, except perhaps to tell you that you don’t need an expert! Seriously, this is the gold standard of investment principles. No one should ever dabble in an investment that they don’t understand personally. It’s better to let a good investment pass by rather than invest in anything that you don’t understand. An expert’s role is not to tell you where to invest — it’s to show you how to decide for yourself.


Joint home loan & family home loan

July 12, 2009

Hi Sir,

We have bought a residential bungalow worth Rs. 41 lacs, and we are three joint holders of the property (Me, my wife and my father). We have taken home loan of Rs.32.8 lacs (80% of actual price) from bank. I and my wife are working as salaried employees of an IT firm and we are repaying the loan, where loan installment per month is Rs.27000 (16000 and 11000 paid by me and my wife respectively).

Now, my queries are as follows:

1. Is it possible that I can take the loan of Rs.6 lac from my mother, to pay rest of the bungalow price? If yes, then what are the tax implications for me & my wife as well as my mother & what are the legal documents required for the same?

2. Can I & my wife both avail the tax exemption on home loan interest (for loan from bank as well as from my mother)? If yes, then what shall be ratio to avail exemption?

Ans. Dear Friend, First let me understand from ur query.

A. Property Cost = 41L
B. No. of owners = 3 (U, ur wife & ur father)
C. Amount pitch in by U & ur wife thru bank loan = 32.8L
D. Additional amount pitch in by both of u = 6L from ur mother as home loan
E. Balance amount = 41 – (32.8+6) = 2.2L

Here I assume, that this 2.2L Rs. r coming from ur father only. Even if both of u do have a part in this 2.2L amt. also plz. do inform me for the same.

As per my assumption share of both of u in the house = 38.8L Rs.

Share in Bank loan EMI = 16000 & 11000 & the same ratio both of u may continue for ur mother`s loan.

Now here comes the answer for ur queries.

1. Yes it`s possible for both of u to take home loan of additional 6L Rs. for the same house from ur mother. The interest paid for this loan to ur mother, `ll be available for Tax benefit for both of u in the ratio as stated above. The interest received by ur mother from both of u `ll be her taxable income & if her total income from all other sources is more than the zero tax limit for her (1.9L Rs. or 2.4L Rs, depending upon her age, as the case may be), she w`d have to pay Tax on it. For this loan, u should prepare a loan agreement between ur mother & both of U.

2. Yes both of u can avail tax benefit on the interest & principal repmt. of bank loan & interest only for mother`s loan. But from ur query it seems that the house in Question `ll be self occupied, hence u & ur wife can`t claim more than 1.5L Rs. each, (1.5+1.5 = 3L) interest on combine loan.

For detailed info u may mail me directly to my mail id.

ashalanshu@gmail. com

thanks

Ashal …


Benefit of section 54F on LTCG

July 3, 2009

Dear Mr. Ashal!

Please clarify the following.

Cost of Purchase 2.42 lakhs (1988)
Cost of improvements 1.00 lakh (approx) 1991.

Cost of improvements 0.16 lakhs (1996).

Sold in 2009 2010 for Rs. 82 lakhs.

Invested in REC/NHAI Bonds 50 lakhs.

Bought another residential property Rs. 32 lakhs.

Taxable long term gains is NIL. Am I right?


Thanks – Subasu
Answer – Dear subasu, b4 I comment here I assume the following –

Purchase year is FY 1988-89.
1st improvement year is FY 1991-92.
2nd improvement year is FY 1996-97.
Year of sell is AY 2009-2010 or FY 2008-2009.

Here goes the LTCG calculation.

A. Purchase price = 2.42L Rs.
B. Cost Inflation index (CII) of FY 1988-89 = 161
C. CII for FY 2008-2009 = 582
D. Indexed purchase price = A*C/B = 2.42*582/161 = 8.75L Rs.
E. 1st improvement price = 1.0L Rs.
F. 1st improvement FY CII = 199
G. Indexed 1st improvement price = E*C/F = 2.92L Rs.
H. 2nd improvement price = .16L Rs.
I. 2nd improvement CII = 305
J. Indexed 2nd improvement price = H*C/I = 0.30L Rs.
K. Total Indexed purchase & improvement price = D + G + J = 11.97L Rs.
L. Sell price = 82L Rs.

As more than 3 years r completed for purchase as well as each of improvement also, hence all r eligible for consideration of LTCG.

M. Hence LTCG = L – K = 70.03L Rs.
N. amount invested in LTCG Tax Saving bonds = 50L
O. amount invested in Res. property = 32L Rs.
P. Total invested amount = N + O = 82L Rs.

As the amount in P above is more than M above, so no LTCG Tax liability is there.

Yes u r right.

Thanks

Ashal

Dear Ashal!

Thanks for the prompt response and detailed calculations.

One more modification would be introduced to this calculation because I did not furnish you with that info.

I had financed this purchase in 1988 with the help of Loans from BHEL and Cement Corporation of India. I have not preserved the interest records. The amount was borrowed in 1984, 1985 and 1986 and repaid completely in 1991.

As I do not know the interest quantum, I do not know what to do with that.

Any suggestions would be welcome.
Thanks once again.

Subasu


Dear subasu, as the records of loans are not with u, also the applicable FYs r also date very back.

Hence I’m sorry to say that u can’t do anything now.

thanks

Ashal


Calculation for Long Term Capital Gain for purchase as well as improvement of the property in subsequent years.

July 2, 2009

Dear Mr. Ashal!

Please clarify the following.

Cost of Purchase 2.42 lakhs (1988)


Cost of improvements 1.00 lakh (approx) 1991.


Cost of improvements 0.16 lakhs (1996).

Sold in 2009 2010 for Rs. 82 lakhs.

Invested in REC/NHAI Bonds 50 lakhs.

Bought another residential property Rs. 32 lakhs.

Taxable long term gains is NIL. Am I right?

-Subasu

Ans.
Dear subasu, b4 I comment here I assume the following –
Purchase year is FY 1988-89.
1st improvement year is FY 1991-92.
2nd improvement year is FY 1996-97.
Year of sell is AY 2009-2010 or FY 2008-2009.
Here goes the LTCG calculation.
A. Purchase price = 2.42L Rs.
B. Cost Inflation index (CII) of FY 1988-89 = 161
C. CII for FY 2008-2009 = 582
D. Indexed purchase price = A*C/B = 2.42*582/161 = 8.75L Rs.
E. 1st improvement price = 1.0L Rs.
F. 1st improvement FY CII = 199
G. Indexed 1st improvement price = E*C/F = 2.92L Rs.
H. 2nd improvement price = .16L Rs.
I. 2nd improvement CII = 305
J. Indexed 2nd improvement price = H*C/I = 0.30L Rs.
K. Total Indexed purchase & improvement price = D + G + J = 11.97L Rs.
L. Sell price = 82L Rs.
As more than 3 years r completed for purchase as well as each of improvement also, hence all r eligible for consideration of LTCG.
M. Hence LTCG = L – K = 70.03L Rs.
N. amount invested in LTCG Tax saving bonds = 50L
O. amount invested in Res. property = 32L Rs.
P. Total invested amount = N + O = 82L Rs.
As the amount in P above is more than M above, so no LTCG Tax liability is there.
Yes u r right.
Thanks
Ashal