The Hindu Business Line : Borrow some good ideas

Until recently, owning a house was among the last in the priorities of a working individual. The older generation usually bought a house using retirement benefits such as provident fund and gratuity, and settled down to lead a peaceful life funded by a monthly pension. Medical costs were not so prohibitively expensive. Disposable surplus was too little. So, loan facilities were not easily available for housing.

But today, both the husband and wife work in many families and earn decent incomes. The Government offers many concessions for housing, which is now recognised as an industry. Banks offer loans liberally at cheap rates of interest and several repayment options to choose from. All this is conducive for individuals to own a house early in their career.

Housing as investment planning

Some of the reasons in favour of housing as investment are:

* Buy a house before prices fly out of the window.

* Appreciation of real estate is comparable with other investments such as shares, securities, etc.

* The investment is relatively safe.

Some banks offer housing loan with life insurance cover. The premium is tagged to the loan instalment. In the unfortunate event that the owner expires during the loan period, the policy matures and the loan amount due is offset against the maturity value of the policy, and the rest is paid to the dependents.

A good investment plan would be to raise a housing loan and repay the instalments over a comfortable period of time. Rather than pay rent, the amount could be used to repay the loan. The pleasure of living in one's house would be an added one, not to forget the capital formation.

Housing as tax planning

Real estate can be effectively used for tax planning.

If one spouse receives house rent allowance, rent paid for the property to the other spouse could be considered for tax planning.

For the other spouse, rent received is subject to the standard deduction at 30 per cent of the annual value. Women can avail a higher exemption limit. The interest on loan, as well as the principal repaid can be gainfully used for tax planning.

Similar tax planning is also available for the Hindu Undivided Family (HUF).

Bank deposits would fetch 6-7 per cent interest per annum. Allowing for inflation, the net increase in real terms may turn negative, as more than 22 per cent of earnings go towards tax. Return on investment in shares and securities appear alluring with high rates of dividend. But this is calculated on face value and not the market value. Rate of return on market value of securities may, once again, turn out to be in single digit.

On the other hand, house rent received is subject to a flat 30 per cent deduction under Section 24. No proof or bill is required. Property tax paid is allowed as deduction. Interest accrued on housing loan is deductible from house rent received. Any loss on house property can be offset against other incomes.

Repayment of housing loan is eligible for deduction from total income, together with other deductions such as life insurance premium, NSC, and PPF, subject to the overall limit of Rs one lakh.

Housing as retirement planning:

Until last year, Section 80 CCC allowed deduction up to Rs 10,000 towards premium for approved pension plan offered by insurance companies. Now this is merged with other payments, subject to a maximum of Rs one lakh.

In this scenario, housing can be good retirement planning. While availing deduction of Rs one lakh, a part of the amount can be used for repayment of housing loan. The rent fetched by the house would take care of loan repayment.

While pension is fully taxable with the withdrawal of standard deduction, rent received is eligible for deduction of 30 per cent. This amount can be used to buy a medical insurance policy, for self and spouse, which again qualifies for deduction.

Therefore, if one plans to invest in small quantities over an extended period of time, housing is an option. Chit funds, recurring deposit schemes, etc. are no longer that attractive.

Housing as financial planning

Forinvestments such as recurring deposits, post office monthly income schemes, etc. one has to budget out of salary. Instead, when a housing loan is taken, the rent received from the property will take care of repayments to a considerable extent. Some banks even lend against future rents receivable from property. This loan can be acquired on existing property to meet the margin for a fresh loan required for a new property. Thus, before retirement, one has not only a house to stay in but also a second house or additional floor that will fetch monthly income.

Alternatively, one can buy a huge plot. The land value is almost certain to appreciate. At the opportune moment, part of the plot can be sold to fund the construction of a house. With support from a housing loan, this would be an apt financial planning.

Housing as resource planning

A house or vacant plot can be a good resource during times of need. Real estate planning can fund medical emergencies, marriage, higher education, etc. Secure a plot or house in a remote area today. Watch it grow in value as time goes by. It is common knowledge that places that were once on the city outskirts are today busy residential and commercial areas.

If you are an industrialist or businessman, you would have realised that real estate is the most acceptable security for term loans. In addition to the primary security, lending institutions require a collateral security and your plot comes in handy.

In some instances where a third-party security is acceptable to banks as collateral security, you can even earn a tidy sum as commission by offering your property as collateral security to a friend in need. No doubt there is always a risk of the loan turning bad. But no pains, no gains.

The author is a Hyderabad-based Chartered Accountant.

Picture by Ch. Vijaya Bhaskar

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