De­ter­min­ing if you are fi­nan­cially ready to buy your first house If you own mul­ti­ple prop­er­ties, only one will be con­sid­ered as self-oc­cu­pied

HT Estates - - FRONT PAGE - Ash­wini Ku­mar Sharma ash­[email protected] Ash­wini Ku­mar Sharma ash­[email protected]

Ravi N Rao, a soft­ware en­gi­neer from Hy­der­abad got mar­ried 5 years back to Swathi Rao, a banker. Ravi andSwathiarenow 34 and 31 years old re­spec­tively. Af­ter two years of their mar­riage, they de­cided to buy a house. The house cost them ₹54 lakh and they took a joint home loan of ₹45 lakh to fund it. At that time, their com­bined salary was about ₹ 1.1 lakh (₹ 65,000 and ₹45,000 re­spec­tively).

Fast for­ward to now and the cou­ple is ex­pect­ing their first child in afew­months. Swathi­has de­cided to take a back seat in her ca­reer and­will be as­tay-at-home par­ent to take care of the child. But it’s not go­ing to be an easy road ahead. As they tran­si­tion from a dou­ble in­come no kids house­hold to sin­gle in­come house­hold with a child, they are wor­ried about ser­vic­ing the EMI, which is about ₹42,500.

“At the time of buy­ing the house, we did not think about such a sit­u­a­tion. We ex­hausted all our sav­ings for the down pay­ment while buy­ing the house,” said Ravi. The cou­ple is not an aber­ra­tion; own­ing real es­tate is con­sid­ered a proud pur­chase by many house­holds which is nor­mally funded through loans. House is one of the big­gest in­vest­ments you make, but it may not al­ways be the best in­vest­ment. You need to as­sess this as­set class on the met­ric of af­ford­abil­ity and fu­ture ser­vice­abil­ity of any loan you take. Here are few fac­tors that should help you de­cide if you are ready.

ANALYSING YOUR FI­NAN­CIAL LIFE

Un­like fi­nan­cial as­sets that are liq­uid—you can re­deem your mu­tual fund units and re­al­ize the money in a few days—real es­tate is not liq­uid. It can take days to months to find a buyer and the en­su­ing has­sle to sell off the prop­erty re­ally makes it a sticky as­set. Any fi­nan­cial plan starts with en­sur­ing a solid emer­gency cor­pus that will take care of any un­fore­seen cir­cum­stances. “Oneshoulden­surethat they have at least 6-9 months of emer­gency fund­ing in liq­uid op­tions,” said Varun Gir­i­lal, co- founder and ex­ec­u­tive di­rec­tor, Mi­traz In­vest­ment Ad­vi­sors. Then comes the short­term goals that you may have and think about how it may im­pact EMI pay­ments. Say, hav­ing a new born may change pri­or­i­ties and that may im­pact in­come of the house­hold. How­ever, the home loan EMIs will con­tinue to ac­crue; so have this dis­cus­sion now rather than later. “The first thing one needs to do is to es­ti­mate the liq­uid­ity, con­tin­gency and funds for neart­erm goals,” said Suresh Sadagopan, founder, Lad­der7 Fi­nan­cial ad­vi­sories, a fi­nan­cial plan­ning f i rm. Make a l i st of your ex­penses—both monthly and an­nual. Also, note down the near term (up to 3-5 years) goals and funds you need for these goals.

AF­FORD­ABIL­ITY

Whether you can af­ford the loan or not is a se­ri­ous ques­tion you need to pon­der upon. Your cur­rent fi­nan­cial po­si­tion with­out touch­ing your emer­gency cor­pus or dis­turb­ing your other fi­nan­cial goals—short- and longterm—should al­low you to make a de­cent down pay­ment. “One needs to see whether they have the 25% up­front amount. Ideally, the higher this amount the bet­ter,” said Sadagopan. You will be more com­fort­able if you can af­ford to make the con­tri­bu­tion of 40% to 50% of the prop­erty value as down pay­ment. Then comes the EMIs. A good thumb rule is to en­sure that your EMI should not take away more than 40% of your take home salary. You need to fig­ure out how you will be able to ser­vice the loan in case of emer­gency like a job loss or in­crease in ex­penses. “A stretch of up to 50% of one’s post­tax monthly in­come in EMIs for the first 1-3 years is man­age­able pro­vided one makes up in build­ing liq­uid fi­nan­cial as­sets in later years,” said Gir­i­lal. Be­sides tak­ing the huge loan, the other mis­take that Rao­made was­mak­ing pre-pay­ment of home loan as and when the cou­ple had some funds.

LIV­ING IN THE HOUSE

Then comes the ul­ti­mate ques­tion of whether you will ac­tu­ally use the house to live in. “This is im­por­tant as peo­ple these days are mo­bile and they go to other lo­ca­tions na­tion­ally or in­ter­na­tion­ally in pur­suance of the ca­reer,” said Sadagopan. If they are not cer­tain, it may not make much sense buy­ing a house—for they will have a home in one city and they may move to an­other and will have to rent out, added Sadagopan.

If you are not plan­ning to live in the same city at least for an­other 5-7 years, it is bet­ter to stay on rent. “If you feel that there is a strong chance of relo- cat­ing , then fac­tor how you would be able to bear the rental cost in the new lo­ca­tion and EMI ser­vic­ing to­gether,” said Gir­i­lal. Sell­ing the house and again buy­ing an­other hou­sein the newc­ity would not be fea­si­ble as it in­volves lot of ef­forts; trans­ac­tion cost—stamp duty, reg­is­tra­tion fee and bro­ker­age—is also very high.

If you de­cide to let out the house, “you may not al­ways be able to get a ten­ant im­me­di­ately. Most hous­ing com­plexes have high main­te­nance costs and one should fac­tor that into monthly cash flow plan­ning,” said Gir­i­lal. It could also be very time con­sum­ing to main­tain a house in an­other city.

Buy­ing a house can’t come at the cost of other im­por­tant goals like your child’s ed­u­ca­tion and your own re­tire­ment nei­ther should it im­pact your life­style sig­nif­i­cantly. “Home loan EMI is one of the big­gest break­ers of pas­sions such as travel, en­trepreneur­ship and other in­ter­ests. Buy­ing a home should not mean hav­ing to work in a highly un­sat­is­fy­ing job or miss­ing out on in­vest­ing for your kids only be­cause of the EMI pres­sure. It can also set off your time to re­tire­ment by a large num­ber of years,” said Gir­i­lal. So, be­sides ser­vic­ing the home loan EMI, one should have enough sav­ings to in­vest for other goals and ex­penses. A lot of peo­ple still pre­fer to in­vest in real es­tate as com­pared to other fi­nan­cial as­sets, and peo­ple who can af­ford it end up with mul­ti­ple prop­er­ties.

While some peo­ple have a house in the city of work as well as in their na­tive place, there are oth­ers who buy one house for reg­u­lar stay and in­vest in a week­end or hol­i­day home in an­other city. Then there are oth­ers whobuy­i­nasec­ond­house­for rental in­come and in­vest­ment pur­poses.

How­ever, if you have mul­ti­ple houses, re­mem­ber that there are tax im­pli­ca­tions on all the houses you own, ex­cept one. Ir­re­spec­tive of whether the houses you own are used by you or your fam­ily, ei­ther reg­u­larly or oc­ca­sion­ally, from the in­come-tax point of view, only one house can be con­sid­ered as self-oc­cu­pied.

While there is no tax to be paid on a self- oc­cu­pied prop­erty, in­come from other houses or the an­nual value of the houses is tax­able.

Here are the in­come-tax rules for a self-oc­cu­pied prop­erty and other prop­er­ties you may own.

SELF-OC­CU­PIED PROP­ERTY

Ac­cord­ing to in­come-tax rules, a self-oc­cu­pied house is one that is oc­cu­pied by the tax­payer through­out the year by her and her fam­ily. In case of a self-oc­cu­pied house, in­come charge­able to tax un­der the head “in­come from house prop­erty” is con­sid­ered ei­ther nil or neg­a­tive (in case the tax­payer has taken a home loan for the prop­erty). In­come tax Act, 1961 al­lows de­duc­tion of up to ₹ 2 lakh in re­spect of in­ter­est on hous­ing loan in case of a self-oc­cu­pied prop­erty, un­der Sec­tion 24(b).

How­ever, in case the tax­payer owns only one prop­erty but does not use it for res­i­den­tial pur­poses ow­ing to her em­ploy­ment, busi­ness or pro­fes­sion in an­other city or lo­ca­tion, where she stays in a rented ac­com­mo­da­tion, the prop­erty she owns will be con­sid­ered self-oc­cu­pied if she does not let it out at any time dur­ing the year or derive any other fi­nan­cial ben­e­fit from it.

DEEMED TO BE LET OUT

If a per­son owns and oc­cu­pies more than one prop­erty for her res­i­dence, then one prop­erty of her choice can be con­sid­ered as self-oc­cu­pied, while all other prop­er­ties will be treated as “deemed to be let out”.

Even if the other prop­er­ties re­main­va­cant­for the en­tire year and do not pro­vide any fi­nan­cial gains to the tax­payer, they will be con­sid­ered as deemed to be let out and tax will need to be paid on its an­nual value.

AN­NUAL VALUE

Ac­cord­ing to Sec­tion 23 of the In­come- tax Act, the an­nual value is “the sum for which the prop­erty might rea­son­ably be ex­pected to let from year to year”. In other words, an­nual value is the po­ten­tial rent that the prop­erty would have fetched if it was rented out. To cal­cu­late the an­nual value, you need to con­sider fac­tors such as stan­dard rent in case the prop­erty lies un­der the ju­ris­dic­tion of Rent Con­trol Leg­is­la­tion or rent based on the mu­nic­i­pal value of the prop­erty or the rent equiv­a­lent to the rent other sim­i­lar prop­er­ties are fetch­ing in the same lo­cal­ity. The higher of these will be con­sid­ered the an­nual value of the prop­erty.

Once the an­nual value is cal­cu­lated, you may be al­lowed to claim few de­duc­tions such as on taxes paid to the mu­nic­i­pal de­part­ment, stan­dard de­duc­tion and in­ter­est paid on home loan that was taken for the pur­pose of pur­chase, con­struc­tion, re­pair, re­newal or re­con­struc­tion of the prop­erty.

If youown­mul­ti­pleprop­er­ties and find it dif­fi­cult to cal­cu­late the an­nual value or tax li­a­bil­ity, it is ad­vis­able to con­tact a tax ex­pert or char­tered ac­coun­tant.

TO CAL­CU­LATE THE AN­NUAL VALUE, YOU NEED TO CON­SIDER FAC­TORS SUCH AS STAN­DARD RENT

GETTY IM­AGES

Buy­ing a house can’t come at the cost of other im­por­tant goals like your child’s ed­u­ca­tion

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