Tax Implications and

Calculations
Wednesday,11th July 2007

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

A Income from Salary

Income from house property
Profit or gain from business or profession
Income from capital gains
Income from other sources

GROSS TAXABLE INCOME (GTI)

B DEDUCTIONS (SEE BELOW)

C TOTAL TAXABLE INCOME (A-B)

D GROSS TAX LIABILITY

E REBATES

F D-E
Surcharge, if applicable and Education

G Add: Cess

H NET TAX LIABILITY (F+G)

EXEMPTIONS - FIGURE A

Section Particulars Exemption Limit

10 (1) Agricultural Income No Limit

Actual Travel Exp.

10 (5) Leave Travel Concessions
Subject to Max. Limit.

10(10) Death cum Retirement gratuity Specified Limit

10(10A) Payment of Commutation of Pension Specified Limit

10(10AA)
Payment of Leave Encashment Specified Limit

10 (10C) Payment received under VRS Specified Limit

 Sum received under Specified types of Life
10(10D) No Limit
Insurance Policy including Bonus

Payments from Statutory P.F. or Public Provident

10 (11) No Limit
Fund

10(16) Scholarship Granted to meet Cost of Education No Limit

10 (34) Dividend paid by Domestic Company No Limit

Income in respect of Units of UTI / Income in

10 (35) No Limit
respect of Mutual Funds
Gifts received from specified relatives or from
56 (2) (v)
anyone on the occasion of your marriage or under No Limit
a will or inheritance
56 (2) (v) Rs. 25000/- per
Other sums of money received as Gift
annum

DEDUCTIONS - FIGURE B

Qualifying Payments / Conditions /

Section
Income Incidents
80 C Life Insurance premium
Cont. to Provident Fund
Cont. to Superannuation
Fund
Cont. to Public Provident
Fund
Cont. to Regional Provident
Fund
Specified Deposit in Post
Office Saving Bank
Unit Linked Insurance Plan
of UTI etc.
Subscription to NSC
Notified Mutual / Pension
Funds
Education expenses for any
two children
Purchase of Units in Mutual
Fund in specified ELSS
Repayment of Housing Loan
Principal amount
Maximum Limit of
Investment in Infrastructure
deduction is Rs.
Bonds
100000/-.
 Payment made to LIC or 1. Pension Received
80CCC
other Insurance is Taxable
Companies under Approved 2. Amount withdrawn
Pension Plan is Taxable
3. Maximum amount
deductible under this
section is Rs.
10000/-

Employer/Employee
Only for central
Contribution to Pension
80CCD government
scheme of central
employees
government
Limit of 10% of basic
salary (plus DA in
some cases) each for
employee
contribution and
employer
contribution

Total deduction under

section 80C, 80CCC and 80
CCD put together cannot
exceed Rs. 100000/-. So if
full deduction is claimed
under section 80C no further
benefits are available under
section 80CCC and section
80CCD

1. Self, Spouse,
Premium paid for
80D Dependent Parents /
approved Insurer for its
Children
Mediclaim
2. Payment should be
Scheme/Critical illness
made by Cheque.
Rider on
3. Max Limit
Life Insurance Policies Rs.10,000 / 15,000
for Senior Citizen

1. Certificate from
Expenses for Medical
80DD Medical Authority
treatment, Training &
required
Rehabilitation of 2. Max Limit
dependent with Rs.50,000 for
disability. Ordinary Disability
Rs.75,000 for
 Severe Disability

Amount paid for Medical 1. Self and Dependent

80DDB
treatment of specified
2. Certificate from
Disease or ailments. Medical Authority
required.
3. Max Limit as in
80DD

1. Available for 7
Interest on Loan taken
80E years from year in
for Higher Education
which
repayment of loan
starts.

Donation for Charitable 1. Donation should

80G
purposes not be in Kind
2. Amount of
80GGA Donation not to
exceed 10% of GTI
3. 50% Generally /
100% in case of PM
Relief Fund etc.

1. Certificate from
Income of person with
80U Medical Authority
Disability
required
(Defined u/s 2(I) of 2. Max Limit as in
PDEOPRFP Act 80DD

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Glossary
Wednesday,11th July 2007

NO, AC does not mean an air-conditioner; neither does FI stand for something like
Formula - 1 in the home loan parlance. Here is a list of words, with their meanings,
that could baffle you otherwise...

AC - Additional Charges (AC) are levied by HFIs that are over and above the
AF- Administrative Fees (AF) is charged by a HFI on the loan amount sanctioned to
you. This fee is normally payable at the time of accepting the offer letter. It is
charged mainly to meet the operating expenses of the loan amount for the entire
tenure. The expenses for technical site visits made to the property are also covered
under this fee.

DAS- Deduction Against Salary. This is an arrangement when a salaried employee

asks his employer to deduct the instalment from his salary and pay it to the financier.
This is done with the mutual consent of the employer and the financier. Some HFIs
offer better rates for customers who are employed in organizations where the HFI
has a DAS arrangment.

DMA/DSA/ Franchisee - Direct Marketing Associate / Direct Sales Associate. This

is an agency of a financier which takes care of customer sales and service. Most car
financiers do not have their field sales force as this is handled by the agency. They
are authorised by the financiers. [Top] DPC - Delayed Payment Charges. It is the
penalty for delay in paying the instalments. [Top] EMI - Equated Monthly Instalment.
This is the instalment and which is payable every month and is a fixed amount
payable every month.

DPC- Charges on the DPC in case of a further delay on your part to pay the
installment due are termed as Additional Charges.

EMI Break up - The EMI is broken up into principal and interest. This break up of
the EMI is never constant and keeps changing from month to month, year to year.
However, the EMI remains constant over the tenure of the loan.

FCNR - FCNR refers to Foreign Currency Non-Repatriable account. This is a Fixed

Deposit Foreign Currency account and not a savings account. Deposits in this account
can be made in any of the five currencies - US Dollar, UK Pound, Deutsche Mark,
Japanese Yen and Euro.

FI - Stands for Field Credit Investigation or plain Field Investigation - most financiers
appoint an outside agency, who authenticates the identity of the client and confirms
his place of residence and office address.
FOIR - The Fixed Obligation to Income Ratio (FOIR) is similar to the IIR as detailed
above. The difference in case of a FOIR is that in FOIR calculation, the HFI takes into
account the installments of all other loans previously availed including the Home
Loan applied for. In other words, this ratio includes all the fixed obligations that you
pay every month. The Fixed Obligations however, do not include statutory deductions
like PF, Profession Tax, etc. and deductions for investment like Voluntary PF, LIC
Premium, Recurring deposit, Contribution towards society, etc.

FSI - Floor Space Index or FSI as it is more popularly known as refers to the ratio of
the Built up area of a property to the area of the land on which it is built. An FSI of
2:1 would mean that the total built up area of the building can be equal to twice the
area of the land on which it is being built.

HFI - HFI stands for Housing Financial Institution and covers banks, corporates and
financial institutions that offer Housing Loans. [Top] IC - Incidental Charges (IC) are
levied by some HFIs for visits made by the collections team to the customers houses
who have delayed the payment of installment.

IIR - The Installment to Income Ratio (IIR) is a term very commonly used by HFIs
to calculate your loan eligibility. It is generally expressed as a percentage. This
percentage denotes the portion of your monthly installment on your Home Loan. This
figure is normally pegged at 40% but can vary on the basis of actual salary details,
qualifications, employer / business, years of experience, growth prospects and
sources of other income. For Example : if IIR is 40% and your Gross Income is Rs.
10,000/- per month, then as per the IIR ratio you will be eligible for a loan where the
installment does not exceed Rs. 4,000/- per month (40% multiplied by Gross
Monthly Income)

LTV / LCR - LTV stands for the Loan to value ratio while LCR stands for the Loan to
cost ratio. They are terms used by various HFIs to signify the loan amount that a
person is eligible for on the total cost of the property. There is a limit on the
maximum loan amount that a person can get for a property irrespective of the loan
eligibility.

NeAR - Net Effective Annualised Rate. This is the net rate paid by the client after
taking into account all discounts, other charges paid, subventions, advance
instalments and is the rate to be used for evaluation of two or more offers.

NOC - This is a document required by all HFIs from the concerned authority in cases
where you are not the owner of the land in which your property is being built. The
authority depends on the type of property i.e. society if the society has been formed
and conveyance deed executed. Builder if it is purchased from a builder directly or if
the society has not been formed. Development authority if the property has been
directly allotted by a development authority, etc. However, if the customer is building
a property on a plot of land that he owns, a NOC is not be required.

NRE - NRE or Non-Resident External Account refers to a savings or a Fixed Deposit

account held by a Non-resident Indian in a bank in <?xml:namespace prefix = st1 ns
= "urn:schemas-microsoft-com:office:smarttags" />India. This account can be
jointly held with an NRI only. The interest income is totally tax free and the principal
and interest are fully repatriable in any of the five currencies - US Dollar, UK Pound,
Deutsche Mark, Japanese Yen and Euro. This is also a rupee account.

NRNR - NRNR refers to Non-resident non-repatriable account. The is a Fixed Deposit

Rupee account and cannot be a savings account. The interest earned in this account
is repatriable in any of the five currencies - US Dollar, UK Pound, Deutsche Mark,
Japanese yen and Euro.

NRO - NRO or Non-Resident Ordinary account refers to the savings or Fixed Deposit
account of a Non-resident Indian in a bank in India. This is a Rupee account. Interest
earned in this account is taxable. The account can be jointly held with a resident
Indian. The principal and interest in this account are non-repatriable.

PDC - Post Dated Cheques. These are issued in favour of the financier for repayment
of loan.

PEMI - This refers to the Pre EMI that you pay when your loan is partly disbursed. In
Home Loans, the disbursement is made as per the stage of construction of the
property. When your loan is partly disbursed, you cannot start paying your EMI.
Instead you pay simple interest on the part amount drawn by you at the rate that is
applicable to you. This is called a PEMI.

PF - Processing fees (PF) is charged at the time of submission of the application form
and covers expenses incurred for processing the application form. This fee has to be
paid upfront by the customer.

PPC - Pre Payment Charges or PPC as it is known stands for the charges that you
incur when you pay back the loan before the completion of the tenure. PPC varies
from one HFI to another. It is either a percentage of the loan amount being prepaid
or a flat value based on the amount of prepayment.

ROI - Rate of Interest or the ROI as it is more popularly known refers to the rate of
interest charged by the HF on your loan. It is the rate at which you pay interest on
the loan that you availed.

Framed construction / RCC - This is a type of construction which is most

commonly used by developers for construction of their project. This indicates that
the entire load of the property rests on the slabs and columns that are constructed
with the use of reinforced concrete. When all the slabs and the columns of the
construction are cast, it is called as the RCC structure or skeleton structure.