Are tax sops enough to make real estate investments appealing?
Homebuyers are a distressed lot. Their equated monthly instalments have been ballooning ever since a flurry of rate hikes by the Reserve Bank of India over the last one year. And many of them decided to immediately prepay part of their home loans, even if that meant breaking their fixed deposits and other investments. Take the case of Delhi-based lawyer Prasouk Jain, who saw his home loan interest rate jump from the sanctioned rate of 6.4% to 9.2% in just 15 months on the back of successive repo rate hikes. He, too, made a part-prepayment of the loan to mitigate the impact. He also negotiated with the bank for a lower rate of 8.4%.
Most homebuyers are now scrambling to make more prepayments. Jain, though, decided against it after doing some number crunching. Jain’s residential property earns him a handsome 7.36% rental yield. He claims a 30% deduction on this rental income. Separately, he can also claim the entire interest paid on the home loan as deduction (under section 24b) since the property is let out and is not occupied by him. To be sure, deduction on interest in a self-occupied property is capped at ₹2 lakh.
After claiming both tax deductions, Jain ’s effective interest paid on the loan comes to just 2.9%. “If I put the prepayment amount in a bank fixed deposit (FD), it will earn me 4.5-5%, post tax-return. That’s higher than the effective interest rate I’m paying on the loan due to the tax sops. I’ve decided to not make any further prepayments," he said.
This is the leverage that tax breaks on real estate purchases give property owners. “People who buy property for rental income don’t have to prepay the loan," said Nishant Batra, chief goal planner, Holistic Prime Wealth, and a mutual fund distributor. To be
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