Converting your rent into EMI has greater resonance now that two self-occupied houses are tax-free
One may be petrified by the prospect of interest outstripping the principal but then there is something called time value of money—you get to enjoy a house now which you cannot afford now.
You get to enjoy a house now which you cannot afford immediately
The lender also makes a sacrifice—the future stream of EMIs are inferior in value as per the present value of rupee
The Finance Bill 2019 has given a greater impetus to home-owning instincts
Rent goes down the drain is the contemptuous refrain of those who are against paying monthly rent, the corresponding benefit from which is fleeting and evanescent. Their advice is even if one cannot buy a house outright with his own funds, it still makes sense to take home loan for a substantial portion of the cost of the house and pay equated monthly installments (EMI) rather than paying rent.
A home loan of Rs 97 lakh which an acquaintance took repayable over a period of 20 years with an EMI of Rs 87,000 involves a total repayment of 2,08,80000, i.e. more than two times the principal. One may be petrified by the prospect of interest outstripping the principal but then there is something called time value of money—you get to enjoy a house now which you cannot currently afford. You are able to afford it immediately thanks to home loan. In addition, with passage of each successive year, the house may become increasingly beyond your reach given the shortage of land in metropolitan cities and the consequent relentless appreciation in property prices.
The lender also makes a sacrifice—the future stream of EMIs are inferior in value as per the present value of rupee concept which is the financial equivalent of the adage, bird in hand is worth two in the bush. This sacrifice correspondingly translates into huge benefit for the borrower—he gets to repay each successive year rupees whose value gets depleted thanks to passage of time.
The Finance Bill 2019 has given a greater impetus to home-owning instincts. As it is, a person is allowed exemption from income-tax on one self-occupied residential house and at the same time claim a loss from it by way of interest on home loan provided such loss allowed for tax purposes cannot exceed Rs 2 lakh per year. This is a sumptuous amount which comes handy for a salaried person otherwise devoid of many tax saving avenues to reduce his tax bill.
To wit, if your salary is Rs 10 lakh, you can bring down your total income by Rs 2 lakh to Rs 8 lakh by buying a house with home loan and occupying it yourself or by allowing your near and dear ones to occupy it. Now two such self-occupied houses would be exempt from tax provided the loss from both on account of interest does not exceed Rs 2 lakh per year for tax purposes.
This latitude can be used to the hilt especially by the one who works away from his home town. Let us say my home town is in Chennai where I own a house but my employment has taken me to New Delhi. The income tax law as it stands is very unreasonable.
It says the Chennai house would be deemed to be let out at its market value unless I keep it under lock and key besides not owning any other house anywhere. Budget 2019 has provided a welcome thaw in this rigidity. I will be able to buy a house in New Delhi and both my houses would make the grade for exemption on account of self-occupation. The Chennai house may be occupied by my ageing parents and the one in Delhi by my nuclear family.
The rent I was paying in Delhi all along can now be intelligently converted into EMI that would at the end of the loan tenure give me yet another immovable property to cherish and secure my life with.
Home away from home is no longer a mere wistful adage. I must, however, hasten to add that the Chennai-Delhi house was only by way of example. It is entirely possible that both the self-occupied houses are in Delhi itself or for that matter in Chennai itself. Both will be exempt under the new scheme of things even though both are in the same city.
(The author is a senior columnist and tweets @smurlidharan)
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