Buying 2nd House, is it really a good option, one need to look up!!!

India Income tax slabs 2012-2013 for General tax payers
Income tax slab (in Rs.)	Tax
0 to 2,00,000	No tax
2,00,001 to 5,00,000	10%
5,00,001 to 10,00,000	20%
Above 10,00,000	30%
India Income tax slabs 2012-2013 for Female tax payers
Income tax slab (in Rs.)	Tax
0 to 2,00,000	No tax
2,00,001 to 5,00,000	10%
5,00,001 to 10,00,000	20%
Above 10,00,000	30%

When we started our career, we all feel that we are earning LESS (and people who started their career 15 years before, took 2 to 3 years to come under income tax bracket and today most of us are in tax bracket straightaway).  

 

Now, the problem is we are earning pretty decent, yet always concerned that most of our salary goes to tax and always worried that can we do something about it.           

General advise most of them get is to go for one more housing loan and get the tax benefit out of your EMI, let’s see is it really a great idea or not?   

    

Scenario 1                 

Let us assume, we are planning to buy a 2^nd flat worth 40 lakhs, of which Rs. 10 Lakhs will be our down payment. So, we are going for a home loan of Rs. 30 lakhs. At the rate of 10.5% housing loan, the EMI will be coming around Rs. 29,951, which we needs to pay for the next 20 years’ time.    

          

Most of the 2^nd house buying thought will come to people who earn more than Rs. 10 Lakhs per annum, and those people are under 30% tax bracket.          

When you are planning to buy 40 lakhs worth of property of which you are going to pay 10 lakhs in advance and 30 lakhs over a period of 240 months at the rate of 30K per month.    

  

Let us understand better, when we apply numbers into it and see how it really works!     

 

1.    Monthly commitment will be Rs. 30,000 for the next 20 years, whereas the rental value of the house will yield only 12K. 

2.  Out of 30K EMI, 26K will go to interest, which you can get tax exemption and at the same time 12K rent you are going to get will add back to your salary. Net to net you will save Rs. 14K per month and in a year it will be 1.68 lakhs of tax. It is huge, right!!!       

3.  To save Rs. 1.68 lakhs per annum, you are investing Rs. 3.6 lakhs per annum, plus your initial down payment of Rs. 10 Lakhs.   

          

4.   By enrolling yourself for the 2nd loan and you end up saving Rs. 1.68 lakhs and in the next 20 years (assume everything constant) you will save Rs. 33.6 lakhs towards tax to the Government. It is lot of money to save!

5.  Probably the house you bought today at Rs. 40 Lakhs value, at the rate of 7% inflation it would be Rs. 1.55 Crore in 20 years’ time, subject to capital gain tax! 

                 

6.  In the next 20 years, eventually you build an asset worth Rs. 1.55 Crore which is decent is the outcome of the option of 2^nd loan.

7.  The condition applied here is you have to pay Rs. 10 lakhs down payment and Rs. 30K EMI for 20 Years.

8.   The assumptions you have to make here is your job will be secured for the next 20 years and paying 30K in addition to your first housing loan as well as EMI in terms of personal loan, car loan during the next 20 years should not create any stress on you!!!  

           

Scenario 2

In case, if you have not opted for 2nd housing loan, probably you live with little stress for sure.

When we are earning, we should be happy to pay tax to the Govt. to enjoy more the better standard of living, that is possible only through taxing the individuals (This can be debated, at least on paper it is true.)

Let us discuss about people who pay taxes will he make anything in the next 20 years…

                  

1.  Out of 30K set aside for EMI, and I will deduct 14K towards tax. So the individual is left with Rs. 16K per month for investment.

2.  16K Per month investment at the rate of 15% CAGR in a diversified equity mutual fund will fetch you Rs. 2.42 Crores. If you are lucky enough to get 18% CAGR, then you will get Rs. 3.74 Crore. Sensex the index has delivered close to 18%, lot of fund has given more than 20% CAGR, yet I take conservative 15% CAGR only.

3.  The initial down payment of Rs. 10 Lakhs invested as lump sum in the next 20 years at the rate of 15%, will be Rs. 1.63 Crore and at the rate of 18% CAGR it will be Rs. 2.73 Crore.

4. I will take a lower return, to manage your expectation it would be 2.42 + 1.63 = 4 Crores as against Rs. 1.55 Crore with applicable tax.

5.   Even if I remove tax also you will get double the return with no tension. Hope you understand.

                 

I am open to any discussion in this regard to understand my thought process better; I hope I have not overlooked anything here! If any, please bring to my notice we can discuss.             

  

My Personal View

1.     I never advocate any investment for the sake of savings, if we do savings and along with that if we get some tax benefit it will be good.

2.  Property price has gone up like anything and at any given point of time you will never go and stay in that property and investing only to get more value in future.

3.     As a planner, I will not advise anyone to go for a 2^nd house for the sake of tax benefit.      

4.     My view is without emotion and unbiased, and purely merit on the investment returns, and if you are emotional, then look at the price you end up paying for your emotional value!!!