IT deduction on self-occupied home

e) Would it help me to save my taxes if before purchasing the new house,I transfer the old house fully in my wife’s name and acquire the new house solely in my name,or transfer the old house in my name and my wife goes for the new house?

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Construction of your house is complete. However,you are not occupying the house or deriving any other monetary benefit out of it due to your employment in another city (house is in Ghaziabad and you are living in Mumbai). Therefore,you can claim this house as self-occupied and the annual value of the property will be NIL for income tax purposes. I presume this is the only house that each one of you own.

Though you are not residing in the house in question,the house will still be treated as self-occupied and you will be entitled to deduction on the home loan principal repayment and interest payment subject to the limits prescribed under the income tax law in this regard.

If you decide to go for another house for self-occupation and assuming that you do not rent out your previous house,you will have the option to choose only one house as self-occupied and the other house will be ‘deemed let out’. The fair rent of such property will be treated as its rental income for the year and taxed accordingly. However,since the property will be treated as rented out,you may claim the actual interest that you pay on the home loan for that property as deduction from the ‘deemed’ rental income,without any upper limit. However,do note that as far as the principal payment is concerned,the aggregate amount (for both the properties) would be subject to the upper limit prescribed under the law in this regard.

Selling off your old house is not advisable in the given downturn of the real estate market. However,if the new house (or the housing loan on it) is causing a strain on your cash flow and you can afford only one house,then before selling the old property,you have to check if you have held it for at least thirty-six months. If no,then the disposal would be subject to short-term capital gains/losses as may be applicable. However,if you have already held it for at least thirty-six months before selling it off,then you may claim the benefit of exemption under section 54. Under this section,the capital gains from the sale of the old house are exempt to the extent they are invested in the construction/purchase of the new house. Do note that in this case,you cannot sell off the new property for at least three years. If you do that,the capital gains earlier claimed exempt would be taxable in your hands in the year of disposal.

I do not see any tax savings in transferring the old house in your wife’s name or yours,because that would call for lots of paperwork and legal costs. Agreed that the gains you make on the transfer could be eligible for exemption under section 54 (explained above) as you would be investing the capital gains in the new house (provided all other conditions are fulfilled),but the transfer of the old house could be subject to income tax scrutiny for determining if there is any tax evasion in the transaction,which is quite a possibility when the transaction occurs between ‘relatives’. Even otherwise,this option is not advisable. However,if you wish to purchase the new house in your sole name or in the sole name of your wife,you may do so.

Since I do not have all the requisite details for the proposed transactions,I would suggest that you avail the services of an income tax practitioner who would go through your case personally and advise you accordingly. l

The author is a chartered accountant.

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