This article came in news paper Times Property dated 17-12-2010
It is always advisable to buy a property with a home loan as you get tax benefits and the advantage of the bank carrying out a due diligence process, writes V Nagarajan
Most homebuyers need a home loan to buy a residential property. There are some who prefer to buy using their own funds. But there are risks associated in such cases. Many people have invested in vacant plots without seeking a site loan and there are instances where such investments have gone sour. The process of seeking a home loan not only assists a homebuyer in tiding over the financial need, but also helps him to a great extent in the due diligence process.
NRIs get benefit of due
For instance, take the case of NRIs who are away from home and who may have to go through the process of legal scrutiny while investing in a property. They have to depend on their relatives or friends. The best way out is to seek a home loan as the legal cell in the bank will scrutinise the documents and certify that the property is free from encumbrances before lending. It is always wiser for such people to invest in projects approved by banks as that ensure that all due diligence process has been completed. Incidentally, the Foreign Exchange Management Act (FEMA) rules prohibit NRIs from investing in agricultural land, farm land and plantation property.
Tax planning done
From a tax planning point of view as well, it would be better to buy a house with a home loan. It is also equally beneficial for those who have an investible surplus to invest in residential property through a home loan. The interest on the loan up to Rs 1.5 lakhs is tax deductible for a self-occupied house. This means a tax saving of nearly Rs 45,000 per individual. A housing loan of Rs 18.75 lakhs attracts around Rs 1.5 lakhs as interest at present. The interest payment can also be adjusted against salary income, business or profession income, or any other income. A loan can be taken from a bank, financial institution, relative or friend.
There is no limit on the deductibility of interest in the case of let-out and commercial properties. It is advisable to go in for a home loan especially when the property is to be let-out. So, you can take as much loan as one you can get from the lending institution. Here again, the interest payment is allowed as a deduction in full while computing 'income from house property'.
Further, capital repayments are eligible for deduction under Section 80C within the overall aggregate limit of Rs 1 lakh. Payments on account of stamp duty, registration fee and other expenses which have been incurred for the purpose of transfer of the house are available for deduction also.
Co-borrowers get benefits
Even while making a joint investment in property, every member gets a special deduction in respect of interest on the loan and also repayment of capital. From the point of wealth tax planning as well, one property is exempt from the purview of wealth tax irrespective of the value of the property for every individual.
Avoid wealth tax
Above all, if an investor is holding more than one residential property, he can avoid payment of wealth tax if the residential properties are given on rent for more than 300 days in a calendar year. Maximum marginal tax rate of 30 percent can be brought down to 21 percent in case the property owned is leased out.
So, go for a home loan while investing in property.