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RAJESHWARI ARVIND THROWS LIGHT ON HOME LOANS

Fixed interest rate home loans

Fixed interest rate home loans are loans where the rate of interest is unchanging over the entire tenure of the loan despite market fluctuations.
The benefit of such loans is that the borrower knows the exact commitment for the number of EMIs and quantum of EMIs.Such loans are perfect for those (i) who do not wish to re-visit their budgeted cash flows in the future (ii) who prefer a fixed rate because they expect floating rates to rise well above the fixed rate in time.
The major drawback with a fixed rate loan is that it is usually 2% to 5% more expensive than a floating rate home loan.Secondly,if,for any reason,the interest rates in the market go down,fixed rate home loan borrowers do not get the benefit of reduced rates.To switch over from fixed to floating,the borrower would be required to pay a switchover fee.

Floating rate home loan

Floating interest rate home loans are arrived at by adding a base rate and a fixed element.As the base rate changes,the floating rate will change accordingly.The biggest benefit of a floating rate home loan is that it is at least 2% to 5% cheaper than fixed interest rates.
Even if the floating rate at some point exceeds the fixed rate,it could later,if the overall market rates decrease,once again go below the fixed rate.When floating rates increase,the bank/housing finance company could either keep the remaining loan tenure fixed and increase the EMI,or,keep the EMI same and increase the loan tenure.The drawback with floating interest rate is the possibility of uneven tenure or EMI.
Experts estimate that 80% of home loans are on a floating rate basis.Banks/housing finance companies prefer this method as it makes their asset-liability mismatch easier to manage.


The writer is the Director,
DMS Financial Services P Ltd

Publication: The Times Of India - Chennai;

Date: Apr 3, 2010;

Section: Times Property;

Page: 31

SHORT-TERM GAINS

RAJESHWARI ARVIND helps you calculate tax implications on plots of land that you buy for investment

    Many individuals consider purchasing plots of land purely for investment purposes with a view to sell them within two or three years. What are the Income-tax implications?

    Income (surplus) derived from the sale of a capital asset whether movable (such as sale of shares, units, etc) or immovable (such as sale of plot of land, building) results in capital gains. Capital gains could be short term or long term and in both cases the surplus is taxable under the Income Tax Act, 1961, under the head Capital Gains.

Equity Shares Vs Property

Where the asset is a share listed in a recognised stock exchange or a unit of a mutual fund then the period of holding should be more than 12 months to be classified as a long-term capital asset otherwise it is classified as a short-term capital asset. For all other assets including property, the period of holding should be more than 36 months to be classified as long term.

    Any income (surplus) derived from sale of a long-term capital asset is taxed as longterm capital gains. Similarly income derived from a short term capital asset is taxed as short-term capital gains. This classification is important as there is differential treatment with respect to levy of income tax for each of them. Let us confine the taxation aspect of capital gains to immovable property, particularly short term.

Computation of short term capital gains

The income (profit) derived from transfer of short-term immovable property is taxed as short-term capital gains. Short-term capital gains are "excess of amount realised" over n the cost of acquisition n the cost of improvement if any such as fencing n Expenses such as brokerage

    The surplus if any is taxed as a shortterm capital gain. The short-term capital gains are simply added to the income and taxed at normal rates. If your income as it is was taxable at the highest slab rate then the short-term capital gains will also be taxed at the highest tax rate. If your income falls below the minimum taxable limit you will need to add the short-term capital gains to this income and then work out the tax as per the slabs given for the aggregate including short-term capital gains. (Of course you can claim deductions under relevant sections such as 80 C, 80 D, 80 G, etc, for any investments/payments made by you from the taxable income including short-term capital gains.)

To illustrate

The Pension income of Ramkumar , a pensioner is Rs1,75,000, who is 65 years old on April 1 2010 . He has short-term capital gains of Rs 5,00,000 on sale of a plot of land in the outskirts of the city. The taxable income in this case will be Rs6,75,000 and being a senior citizen he will have exemption of upto Rs2,40,000. The first slab of income being Rs5,00,000 (as per the Union Budget announced in February 2010 applicable from the period April 1), on an amount of Rs2,60,000 he will pay tax at 10% amounting to Rs26,000 and on the balance Rs1,75,000(6,75,000 minus 5,00,000) he will pay tax at 20% thus paying a total tax of Rs61,000 (26,000+ 35,000)

    If Ramkumar had no other income other than short-term capital gains then his total taxable income will be Rs5,00,000 on which he has an exemption of upto Rs2,40,000 and on the balance income of Rs2,60,000 he will pay a tax of 10% which works out to Rs26,000. If Ramkumar had also taken a policy for health insurance by paying Rs10,000 then his total taxable income will be Rs2,50,000 (Rs2,60,000 minus Rs10,000) and he will pay a tax of Rs25,000.

The writer is the Director,

    DMS Financial Services Pvt Ltd