Personal Finance

Bolstering salary

S. Sundararaman S. Guruprasad | Updated on May 07, 2011 Published on May 07, 2011

In this era of package-driven remuneration, it is common to have remuneration fixed on cost-to-company (CTC) basis. It has become a practice to leave the choice to the employee to decide on the components of such a package. In some cases, employees in early stages of career find it a challenge to manage their financial affairs in a way that the tax outflow is minimal.

The acceptability of planning the incidence of taxation as a philosophy is to be looked into. One of the foremost requirement of people in the nascent stage of their career is housing. And there is no better way to own a house that by availing loans and claiming the interest on borrowings as a deduction for income-tax. It is sensible to seek double benefit of long-term investment and to minimise the tax burden. Invariably, most people do not prefer the property to be an investment property and, so, occupy it.

The two benefits that usually arise from the taxation point of view of such a transaction are the deduction of interest portion under income from house property (restricted to Rs 1,50,000 due to self-occupation) and deduction of the principal portion from the total income. In these days of the boom in the realty sector, coupled with rising interest rates, a good amount of interest goes unclaimed as a deduction in a self-occupied house property as opposed to let-out property.

An alternative is to replace self-occupation by self-leasing. In self-leasing the property owner leases the property to the employer, who offers the same property as rent-free accommodation to the owner.

For instance, Mr X owns a house property. He leases the property to his employer, who provides the same property as rent-free accommodation to Mr X. The employee's CTC package is divided between salary and lease rent. The employee gets deduction on the interest, as against the restriction up to Rs 1,50,000 for self-occupied property. He can avail a deduction of 30 per cent on the lease rent.

For example: Mr X has a package of Rs 2,400,000 a year and has a house property worth Rs 7,500,000. He has taken a bank loan of Rs 60,00,000 at 10 per cent. The comparison between occupying the property himself and self-leasing the property is given in the table.

It can be observed from the example that the self-leasing model has led to a savings of Rs 2,28,750. There is a likely interpretation that the I-T department may take for restricting the deduction under section 24 on the premise that the property is in the occupation of the owner should be deemed as self-occupied and hence the interest, according to second proviso of Section 24(2), should be restricted to Rs 1,50,000. In that case it would be difficult for the department to sustain the addition on account of perquisite, the consequence of which is lower incidence of income-tax.

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