Reintroduced indexation for property disallows loss offsets, excludes NRIs Real estate buyers get tax breaks on both the loan used to buy the property and income earned from it, i.e, rent. On a let-out house, the full interest paid towards home loan can be deducted. In the case of a self-occupied or an empty house (not rented out), interest up to ₹2 lakh can be deducted.
Effectively, this means ₹2 lakh is your loss from the property, which you can offset against your salary or any other income when paying tax. As for rental yield, the government offers a 30% standard deduction. This is meant to cover maintenance costs, but in reality maintenance costs are usually less than 30% of rent, resulting in savings.
The owner can also deduct property and municipal taxes paid during the year. No other asset class gets this deduction benefit. Also read | No indexation: Sale of homes needs to be taxed at the same rate as salaried income Combined, these tax breaks give prospective buyers enough leverage to invest in a property with a loan for rental income.
Let’s explain this with an example. Say you buy a house with a home loan at 10% interest rate. You have rented it out and are in the 30% tax bracket.
Since you get a deduction on the full interest, the effective interest rate drops to 7%. Also assume that the rental yield is 3% and the property’s value appreciates by 5% a year. After the 30% standard deduction, the taxable yield is 2.1%.
After paying 30% tax on it, your net post-tax yield is 2.37%. On adding the 5% price appreciation, the annual rate of return works out to 7.37%, or 37basis points more than the interest. In this example, the net return on the house surpasses the cost of ownership.
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