Tax saving through home loan: Little known facts

It is not really simple for a layman to understand tax-related rules, benefits, deductions and calculations. If you intend to avail all tax benefits and save money on tax, there is no option but to scale the summit. It is true that only a small percentage of people who borrow home loan understand the intricacies as well as benefits of a home loan.

 

Take the case of Mr Pratham, a 30-something executive in an FMCG company. He is young, successful and full of confidence. He, however, landed in a soup due to the half-baked information that he had while availing home loan. In his own words: “I took home loan to save tax. I thought such a stud I am. But I did not know some hidden facts like I can avail no tax benefits till the time of possession of property. The entire scenario has changed and now I feel like dud.”

You can also land in a situation similar to that of Pratham if you take any loan with half baked information. Here are some of the useful tips to help you find your way through the minefield:

 

Be the owner of the property

Pratham should have known that the first requirement for claiming tax benefit is that one should own the property. Therefore, if your house is under construction, or you will get possession in next three years or five years, till the time you can’t claim tax benefits.
 

Go for joint benefits

If you have taken a joint loan and your parents, spouse is co-borrower, in that situation he/she can claim for tax benefits to maximum limit. The co-borrowers can individually claim benefits on principal as well as interest paid for the loan.

 

Claiming deductions on EMIs

You repay your home loan through EMIs, therefore, you can claim deductions on principal and interest components of the EMI. You can claim deduction on your principal amount under Section 80C of the Income Tax Act.

To claim the tax benefits, you should know that a maximum amount of Rs 1.5 lakh can be claimed on principal amount. You can also claim up to Rs 2 lakh as deduction from the interest component. If the property is not self-occupied, there is no limit for tax deduction. To know the exact portion of how much amount you paid towards principal and interest, you can check your detailed bank statement. You can get the information of total amount you paid along with fractions of these two components.

 

Stamp duty/registration fee

You can also claim payments made as stamp duty/registration fee under Section 80C, but deductions can be claimed in the year of payment only.

 

Pre-EMI tax deduction

After you get the possession of property, you can claim deduction on the interest component of pre-EMI. You can claim it in five installments over five years from the year the construction work gets completed.

 

Suppose, Pratham bought a house in May 2012 and his interest payment in next two-and-a-half years was Rs 5,00,000. He receives possession certificate in November 2014. He can claim Rs 5 lakh in five equal installments for the next five years which will come to Rs 1,00,000 per year. However, the annual limit for exemption will still remain at Rs 1.5 lakh.
 

What if you have bought the property for investment purpose?

If you bought a house just for investment purpose, You should be aware of that you can’t claim any tax benefits on your principal component if you sell the property within five years of purchase. However, this will not affect the deductions claimed on interest component.

 

Money borrowed from friends, relatives

A friend in need is a friend indeed. True, approaching a friend during the time of distress is quite natural. Many people borrow from friends and relatives while buying a property. But in such a case, you cannot claim benefits on the principal part of the loan.
 

Loan taken for renovation

If you are borrowing for renovation of your house, you cannot claim deduction on the principal amount. If the house is self-occupied you can claim benefits on interest component upto Rs 30,000 in a year.
 

Availing loan for tax planning

You should plan your tax savings taking into consideration all benefits, rebates and deductions. The break-up of interest and principal amount paid in a year will give you an idea of the deduction you can claim.

Once you make the assessment, you can plan investments life insurance, bonds or other instruments to save taxes.