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Rent to pay EMI strategy: Pros and cons

For people looking at investing in real estate, there are two options available. A house is an investment when you look at making money from it, either in the form of rentals or by re-selling it at a higher price. That is why in personal finance, the self-occupied property is never counted as an investment asset.

Two options

Let us look at the options available:

1. You can book a flat when the project is launched and sell it when the project is completed.

2. You can buy a ready-to-move in property and start getting rentals right away. These rentals can partially fund EMIs.

Let us examine, which of the two options is financially better:

Book at launch and sell when complete: When you book a flat, you have to put in only a smaller sum of money. The return on investment may be better. However, if you were to borrow to purchase the flat, you might have to keep paying pre-EMI or interest on the amount borrowed until you can sell the property.

This is an expense without any tax benefits. Also, remember the capital gains tax aspect. If the property is resold for a profit within three years of the agreement date, then the gains are fully taxed with no scope of savings.

Booking a ready-to-move in property:

The above problems with purchasing and selling a flat can be partially negated when you purchase a ready to occupy property. You can purchase the property with a loan and start paying EMIs immediately.

This means both the interest paid without any limit and also the principal repaid up to a maximum of Rs 1 lakh (under Section 80C) can be claimed as deduction from taxable income. There are many options to also save tax on capital gains when a property is sold after three years. Until then rentals can also be enjoyed.

However, it has its own setbacks:

Income earned as rental is taxable as income from house property

On an average, the rental income from house property will be in the range of 3-5 per cent of the value of the house. Which means, say you buy a house for Rs 50 lakh and avail loan for 80 per cent of the value, your EMI for a 20-year loan at 10 per cent interest will be about Rs 39,000. In addition, the same property will yield about Rs 15,000-18,000 as rent. The rest of the

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