Buying a home, especially with a home loan, has huge tax implications for the homebuyer. An overview of the tax laws and how they impact the homebuyer

No matter how much you write on the subject of Income Tax, the subject remains as complicated as ever before.

Hence, here, the aim is to be as concise as possible without making the issue too complicated.

However, this is just for a broad level understanding of the subject. For taking any decisions it is recommended that you take the advice of a qualified tax practitioner.

There are 4 things that you need to understand to get a fundamental knowledge of Income Tax.

These are:

Taxable Income

Income is taxed under 5 basic heads:

Salaries - Income is calculated under this head after allowing for deduction of profession tax paid.

Income from House property - Income is calculated under this head after allowing deduction for interest paid on loans taken for acquiring the property and a standard deduction.

Capital Gains - The capital gains earned after deducting the cost of acquisition and improvement of the asset is chargeable under this head.

Profit and gains from Business or Profession - The profits earned from a business or profession after deducting the expenses incurred from the gross income of a business are taxable under this head.

Income from other Sources - All items of income not covered in the above four heads are chargeable to tax under this head after deducting expenses incurred in earning those incomes.

One important thing to remember is that calculation of income under any head (except Salaries) can result in a loss (if expenses are more than the income). Generally speaking, if you leave out Income under the head "Capital Gains" and Income from speculative businesses the losses from one source of income can be set off against the income calculated from another source under the same head or another head of Income. Loss under the head "Profit and Gains of Business or Profession" is not allowed to be set off against salary income.

Thus any loss under the head "Income from House Property" can be set off against incomes shown under the head "Salaries" or "Profit and Gains from Business or Profession".

The aggregate of the income from all these sources put together (after adjusting losses, if any, as mentioned above) constitute "Gross Total Income" or "GTI".

Deductions from Gross Total Income

• 1. These are deductions available from your GTI. The deductions are available from Gross Total Income for certain kinds of income/expenses. Some examples are:
• 2. Investments made in life insurance policies, or contribution made by you towards the employee provident fund or investment in PPF, or for repayment of capital portion of the home loan to Banks/employer companies, investment in infrastructure bonds, investment in notified schemes of mutual funds, contribution to the pension scheme of the central government, tuition fees paid for your children etc. (Section 80C, 80CCC and 80CCD)

1. Expenses on Medical policies (section 80D),
2. Interest on education loans (section 80E)
3. Donations to recognized charitable bodies (section 80G and section 80GGA),

The Total Taxable income or TTI is calculated after deducting these items from your GTI.

Exemptions

These are incomes that are not chargeable to Income Tax at all. That means that they do not, ab initio, form part of your taxable income. Some examples are

From Salaries: House Rent Allowance/Leave Travel Allowance/Conveyance Allowance, which is exempt to the extent provided in the Act and rules.

From Income from other sources: Income on RBI Tax Free Bonds, Interest on Public provident fund, gifts received from specified relatives or on the occasion of marriage (from anyone) or under a will, etc.

Thus these incomes do not form part of your GTI at all.

The Tax payable is calculated based on the TTI based on slabs which are well known. There is a surcharge of 10% if the TTI exceeds Rs. 10, 00,000/-. In all cases there is an education cess of 2% of the tax payable (including the surcharge, if applicable).

The calculation of tax payable by you can therefore be summarised as under:

CALCULATION OF TAX LIABILITY

EXEMPTIONS - FIGURE A

DEDUCTIONS - FIGURE B