Investing In Urban Residential Real Estate In India
May 20, 2012 22 Comments
The travails of the Western world might put a question mark on the expression “as safe as houses”. but in India, urban real estate continues to make sense as an investment option.
Here are the reasons:-
First:In the US, the average members in a household are 2.6. In India, there is an estimated shortage of 21 million housing units and unless there is a dramatic increase in supply, the shortage is not likely to come down because there is a sizeable young population adding to the demand .Also Indians will continue to migrate to cities and 50% of the country will be urbanized by 2044.As families often resort to step-migration many TierII towns will do as well as the major cities as investment destinations.
Second:The high rates of inflation and wage rises are bound to make houses more expensive to build in future.So residential real estate investments are bound to hold their value and possibly continue to give good capital gains.
Third:For those with high disposable incomes and tax liabilities, real estate investment makes an interesting proposition.Section 80C of the Income Tax Act allows an amount up to Rs. 1 Lakh to be deducted from a taxpayer’s income if it is invested in qualified instruments.Included in this list is principal repayment for home loans.There is only one condition here – principal repayment can be considered as a valid investment under section 80C only if it is made for a self occupied house. That is, the taxpayer should be living in the house for which he/she is making the principal repayment.The only exclusion is if the house is not in the city in which the tax-payer is living and working – in which case he/she can claim the principal repayment as an investment under sec 80C even if the house is not self occupied.So if a person works and stays in Mumbai, and has another house in Mumbai for which he/she is paying the EMI, he/she can’t claim the principal repayment under section 80c for this other house. But if he/she is working and staying in Pune, and has a house in Mumbai for which he/she is paying the EMI, he/she can claim the principal repayment under section 80c. This is true even if the person has rented out the house.Another important point is that there is no restriction on the number of houses for this benefit – the only restriction is that the house should be self occupied.Thus, if a person is working and staying in Pune in his/her own house for which he/she pays EMI, and the person has a house in Mumbai for which he/she is paying the EMI as well, he/she can claim the principal repayment under section 80c for both the houses as he/she is satisfying the “self-occupied” rule (with the allowed exception). This is true even if he/she has rented out the Mumbai house.Moreover,the interest the person pays as the part of EMI is considered an expense under the head “Income from House Property”, and is deductible up to a maximum of Rs. 1.5 Lakhs under Section 24 of the Income Tax Act.The interest amount would appear as a negative amount under the head “Income from House Property”, and would thus be deductible from the taxpayer’s total income under Sec 24.Even if the person has any other income from the house (like rent), that income would get reduced by the amount of interest paid.The best part is that there is no restriction of “self occupied property” for claiming the tax break on interest paid under sec 24. In fact, if the person has rented out his/her house, all interest paid (even if it is more than Rs. 1.5 Lakhs) is deductible from the rent received.And just like the principal repayment, there is no restriction on the number of houses for this benefit – the only restriction is the limit of Rs. 1.5 Lakhs. Thus, if you are paying the EMI for 3 houses, you can claim interest paid for all the 3 houses under Sec 24 as long as it doesn’t exceed Rs. 1.5 Lakhs.Further,if there is more than one income-tax payee in the household,the home loan can be taken in their joint names so that the tax benefit (for both principal repayment and interest paid) would be available to all of them if the house is also in joint name.The tax benefit is available in the ratio of EMIs paid – thus, if person 1 pays 40% of the EMIs, and person 2 pays 60% of the EMIs, the tax benefit would also be available in the proportion of 40% & 60%.