How home loan helps in saving tax?
Moving into your own home is dream of many, especially of those who are living in a rented property. The first step towards this journey is searching a property. If you have already finalized a property, lender and now all you are waiting to sign a few documents and move into your dream home. But are you well-aware of the issues and benefits related to your home loan. Have you read all the terms, conditions and other documents minutely before borrowing home loan. You should not consider home loan just a liability, but you can take some advantages as well. You can avail multiple tax benefits on your home loan. Thorough understanding of benefits and other terms can help you in managing your finances hassle free and lower tax payments. You should consider some important points in mind to get the maximum tax benefits out of your home loan.
Under-construction property or ready-to-move home?
You should not ignore the fact that ready-to-move-in properties are much more expensive as compared to under-construction ones, but in case of former, you can avail tax benefits from very first day. You should remember that you can’t claim tax benefits on your home loan until you will not get possession of you property.
- No tax benefits under Section 80C of the Income Tax Act until the construction work will get accomplished.
- You can claim deduction on the interest paid during the construction period in five equal installments only after the project is over. If you do not claim any of the five installments, the same is not carried over to the next year.
- In case of an under-construction property, the borrower is required to complete construction work within three years, failing which he would not be eligible to claim deduction of Rs 2,00,000. In such scenario, he can get a deduction of Rs 30,000 only.
- Tax benefits on both principal as well as interest components of your loan. Under Section 24, if your ready-to-move-in property is self-occupied you can get deduction on interest upto Rs 2,00,000. Under Section 80C, you can claim deduction of upto Rs 1.5 lakh on principal amount.
Therefore, ready-to-move-in property is always a smart choice so far as the tax benefits are concerned. You should always remember that you can’t claim tax benefits in case you have bought a plot. In this case, deductions will be same in case of an under-construction property.
Second home
In case of second home, while the deduction cap on principal (of home loan) repayment remains at Rs 1.5 lakh, the full interest amount is eligible for deduction. However, there is a catch. You can avail the tax benefits on second home only if you are showing rental income from the second house.
Even if the second home is empty, it would be deemed let-out, and is considered to be earning a notional rental income based on the market rate.
How to calculate rental income and interest (on home loan) amount for tax deduction
| Actual or notional annual rent | Rs 3,00,000 |
| Less: Municipal or local body taxes | Rs 50,000 |
| Annual rent | Rs 2,50,000 |
| Less: 30% of net rent as repair and maintenance charges | Rs 75,000 |
| Income from house property | Rs 1,75,000 |
| Less: Interest paid on home loan during the year | Rs 3,40,000 |
| Taxable income from house property | (-) Rs 1,65,000 |
| Amount eligible for deduction under Sec 24 | Rs 1,65,000 |
| Total tax saving (for 30% tax bracket) | Rs 50,985 |
Self-Occupied Property
If you are living in your own residential property, it is known as self-occupied property. But, in case you have more than one property on your name, it will be taken as LOP or DLOP.
You can have only one self-occupied property at a time.
Points to Remember
To get maximum tax benefits, here are a few points that you must avoid:
- Go for ready-to-move-in property to avoid delays in getting tax benefits. In under-construction property, tax benefits may come late, or may not even come at all!
- In an attempt to put off their debt burden early, many borrowers tend to opt for shorter tenure or try to prepay their home loan. If you have 20-25 years of retirement, you should not rush to prepay your home loan as you may lose out on tax benefits.
- There are many people who have a lump sum at their disposal and use it for down payment to ensure that they take lower amount as loan. In such situations, instead of investing money into real estate, one should invest in mutual funds which offer you better tax rebates.
- Under-construction property deals are often sugar-coated with plenty of offers such as free gold coin, free car, parking facility or other freebies. However, in a ready-to-move property you stand to gain much more than these freebies in the long run as interest as well as principal amount are eligible for deduction.
- Always keep in mind the long-term loss before you latch onto short-term gains. Make all the calculations in advance if you are planning to sell your house within three years of its purchase. In such a scenario, your tax exemptions get reversed and you are also liable to pay tax on the profits made through sale.
How to maximize benefits?
- If your spouse is also working, you can avail a joint home loan. With this, you and your spouse can claim separate deductions provided both are co-owners as well as co-borrower.
- Not only principal and interest components, you can also claim deduction on payment towards registration and stamp duty under Section 80C. However, you can claim it only in the year in which the payments were made
