Property Investment is the most efficient way to save tax

As the celebrations and wishes of the New Year fizzle out we are now faced with a more real question. The question of tax saving for the year; and always it is the time when those of us working in the area of personal finance are flooded with questions about tax savings. What is the most efficient way to save tax?

How should we allocate our tax investments for the year? For me the answer is very clear, every rupee saved on tax is a rupee earned and a home loan is the most efficient tax saving instrument available to us. You can claim a deduction of a maximum of Rs 1.5 lakh on principal repayment and Rs 2 lakh on interest payment (in case the home is self-occupied).If the home has been rented out, you can claim the total interest paid as a deduction. While I strongly support the argument to increase the deduction on home loans from the current limits, we should make the most of the deduction that is available to use now.

There is no debating the stability of real estate as an asset and as an investment in this country. But if like me you live in one of India's big cities, you know that's easier said than done. On an average, renting a home, especially in Mumbai, is at least 80 percent cheaper on your monthly budget than buying the exact same one.

A modest one-bedroom apartment in one of Mumbai's very distant suburbs like Kandivali (E) currently costs a minimum of Rs 1 crore and upwards depending on the age and quality of the construction. Just to drive home that point. That's Rs 1,00,00,000! So we are talking about a cash down payment of Rs 20 lakh and a monthly EMI of roughly Rs 95 thousand to 1 lakh for the next 20 years! If you were to rent the exact same apartment it would cost you about Rs 20,000. If you are a young homebuyer an EMI of Rs 1 lakh might seem like a tough ask. You would never be able to change jobs with ease, take a sabbatical or go back to school for that midcareer degree you have been thinking about.

But how do you buy your first home and still manage to have some head room after paying your EMI. Here is a possible solution. Rent in Mumbai and buy in a smaller city. A two-bedroom home in a city like Thane, Ambarnath, Bhiwandi, which currently offers a promise of higher capital appreciation than Mumbai, can still be bought for Rs 40 lakh which will translate to a total outgo of roughly Rs 30,000 in EMIs.

Add that to the rent and you are still only committing Rs 50,000 a month. You can claim the tax benefits on your home loan and also claim your HRA deduction. If you rent out the purchased apartment when it is ready to occupy, you will also be able to claim the total interest paid as a tax deduction. The calculations seem to make sense, now all you have to do is find the right home in Thane.



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