Is Buying Property A Good Option To Save Taxes?

Written by Suresh Sadagopan

If one wants to avoid getting entangled in the emotional aspects of real estate investing & make financially sound decisions , it is imperative that these real estate myths be recognised & dismissed. In this info-bite, we will debunk a fondly held myth in respect of property investment.

‘Firstly, saving taxes is a secondary objective. One cannot invest in a big ticket item like property, just to save taxes. When one invests in property, one takes on a huge liability for several years, decades. This kind of leverage does not come cheap; one needs to pay interest, which people breezily ignore. In your example, I had shown that today’s value of interest paid over time would be Rs.1.12 Crores. This adds to the cost tremendously.’

‘Huge loans can pose a problem if there is a disruption in cashflows for some reason, in future. EMIs cannot be stopped. If one is just investing the surpluses ( after paying rent ) on a monthly basis, that can be stopped temporarily, if there is a cashflow problem.’

‘Also, tax savings allowed is just Rs.2 Lakhs per property, as a deduction. Hence, even for those in the 30% tax bracket, the saving is about Rs.60,000 pa. It is a small saving compared with what one needs to invest & the kind of loan one has to take on. Tax savings is hence hardly a justification for buying a property, after assuming huge liability & paying crores of rupees for it.’

Let me also point out that the rent paid too can be set off against tax, using a one in three formula – lower of HR, 50% of basic for Class A cites ( 40% for the rest ). 10% of rent paid above basic. So, the rent pais is also being subsidized by the government. Hence, buying the home is not the only way to save tax. Even now, you are saving taxes when you are paying rent.