Finergo Episode 09 12jan09

04 KALEIDOSCOPE

Ask your query Q: I visited the United Kingdom on a project for my company. I saved some money from my daily allowance. Will I have to pay income tax when I get this money to India? Kadhirvel – TCS, Chennai

Answer: Kadhir, allowances will not be taxed if you actually spend them and show proof of expenditure by showing bills. If you get it back in the form of physical cash it will be added to your income and taxed. Q: I have been investing in four SIPs for the past 2.5 years. Seeing the sensex falling so drastically I realise I have lost quite a lot of money, should I stop investing now? Saranya – CTS, Coimbatore

Answer: Saranya, it is better you hold on the funds and let them recover unless you need cash urgently. Also, the good thing is that you have used the SIP route and would benefit by continuing now. If you stop now then you will loose the opportunity you get by rupee cost averaging.

Mini Quiz The first person to send in gets a free executive diary Q1: FMP is the acronym for Flexible monthly payments Fixed maturity plan First monthly payment Floating monthly payment Q2: EPS used in stock market is the acronym for Equated Payment scheme Equally Priced Shares Earnings Per Share Exempted Proprietary Shares Send your answers to [email protected] or SMS your answers to 92813 98889. For example if you choose A as the answer to question 1 and B as the answer to question 2 type it as 1A2B and send it.

Word in Word Find out all seven-letter words that can be derived using only the letters of the following words. 1. Diversified 2. Investment 3. Portfolio 4. Financial 5. Insurance Answers on Page 7

ERGO Monday, January 12, 2009

HOUSING LOAN

as tax saving tool – myth or reality?

L

et’s look at housing loan as a tax-saving tool. The tax benefits come in two ways: The principal component of the repayment will give benefits under Section 80C (See Finergo dated 5 Jan 5 2009); and the interest component under Section 24 up to an amount of Rs. 1.5 lakh. The major benefit thus comes from the interest component. Since taxable income reduces to an extent of Rs. 1.5 lakhs, there is a huge reduction in income tax too.So is housing loan a wealth creator or destroyer? Finerva believes that a housing loan is a drain on your wealth; here’s how.

HRA becomes taxable The minute you take a housing loan for tax benefits, the HRA component becomes fully taxable. This amount gets added to your income. The irony is that as time goes on, your interest component keeps coming down but your HRA keeps increasing with your salary. You cannot claim your HRA unless you

for the lender.

What If I Don’t Take a Housing Loan?

shift to another city.

Interest Outflow does not come back The benefits from all the components in Section 80C (except the children’s education fees) come back to us as they are investments – including the housing loan principal. But interest on the housing loan is an expense. It goes out, never to come back to us. In fact it is income

If you don’t take a housing loan, you will pay an additional income tax to a maximum of Rs.50, 985 (even if you are in the highest tax bracket Salary higher than Rs. 10 lakhs per year). Others will pay much lesser tax. Even in the highest bracket, by not taking a housing loan, you have a surplus of close to Rs. One lakh at your disposal for additional investment. Remember investments come back to you after growing. That’s wealth creation.

Summary Though housing loan is used by most salaried people to save tax which it doesn’t - it is negative on wealth creation. This is because of the structure of Section 24 of the Income Tax Act which gives the benefit from a housing loan form the interest component only. Interest being an expense does not add to wealth. ■