Buying a home is always a dream. It needs to be well planned and then executed so as to make the most of it. In fact it is quite an important step in Financial Planning. Managing to buy a home out of once own savings seems a faraway dream even for high net worth individuals. There is always a case of savings falling short of the property value. Thus, Home Loan comes to the rescue!
However, with the falling interest rate regime and the introduction of tax benefits on the interest paid on housing loan and repayment of principal amount, taking a home loan is not only easy but also a favored option. In fact, even if you have the money to buy it outright, availing a home loan may be mathematically a better option. Multiple tax benefits are one of the most important reasons for availing a Home Loan. In this article we will discuss Tax Benefits on Home Loan
The tax benefits under various sections of the Income Tax Act not only attract people who need a loan put is also beneficial for people who can pay out of there on source of savings, as it provides them flexibility in payment and they need not do away with their liquidity.
Let’s first note the various income tax provisions under which tax benefits are available to the tax payers:
- Tax Benefits for Interest paid on housing loan: Repayment of housing loan is through Equated Monthly Installments (EMI) which consists of principal and interest component. Interest component of the EMI is allowed as deduction under the head ‘Income from Housing Property’, u/s 24 of the Income Tax Act. The amount permissible for deduction is Rs. 2,00,000/- . Further, in case the house against which loan is taken is given on rent, there is no cap on the amount of interest allowed as deduction.
- Tax Benefits for Repayment of principal on Home Loan: The principal component paid out of the EMI is permissible as deduction up to Rs. 1,50,000/- under section 80C of the Income Tax Act.
- Interest paid during the pre-construction period on Home Loan: Interest deduction cannot be claimed for under construction property. However, once the construction is completed, the amount of interest paid on the loan borrowed prior to completion, which is ‘Pre-construction interest’, can be claimed as deduction in 5 equal installments from the financial year in which construction is completed. Further, construction has to be completed within 5 years from the end of the financial year in which loan is taken.
Thus, the above deductions if availed prudently could benefit the tax payer and home loan becomes a favored option to putting in savings.
Also, keep in mind the following points while maximizing deduction benefits:
- Higher deduction in case of a Joint Home loan and ownership: In case both husband and wife are working, the deduction with respect to interest on home loan and repayment of principal can be claimed by both in proportion of their ownership share.
Let us understand with a simple illustration:
In the following cases, it is assumed that home loan of Rs. 50 lakhs is availed for a period of 20yrs @9.5%.
Case 1: The house is owned and Home loan is taken by a single holder.
Case 2: The house is jointly owned and Home loan is taken by both the partners.
The table below shows the amount of deduction that can be claimed in the first year.
|Case 1||Case 2|
|Loan Taken by||Single Holder||Wife||Husband|
|Loan Amount (In Rs.)||5,000,000||2,500,000||2,500,000|
|No. of Years||20 years||20 years|
|Rate of Interest for Home Loan||9.5%||9.5%|
|Equated Monthly Installment (EMI) per month (In Rs.)||46,607||23,304||23,304|
|Amount repaid Annually (In Rs.)||559,284||279,642||279,642|
|Interest Amount repaid (In Rs.)||471,232||235,616||235,616|
|Principal Amount repaid (In Rs.)||88,052||44,026||44,026|
|Tax Deduction that Can be claimed|
|Interest deduction u/s24 (In Rs.)||200,000||200,000||200,000|
|Repayment of principal u/s 80C (In Rs.)||88,052||44,026||44,026|
|Total deduction that can be claimed (In Rs.)||288,052||244,026||244,026|
|Total deduction claimed by the family||Rs. 288,052||Rs. 488,052|
From the above illustration, you will notice that together a couple can claim additional deduction of Rs. 2 lakhs.
- Avail both Home loan deduction and House Rent Allowance (HRA) exemption: The deduction u/s 24 (Interest on home loan) and u/s 80C (Repayment of principal) can be claimed along with exemption of HRA. For e.g. A person has bought a flat in Pune and taken a home loan for the same. However, due to his job requirement he needed to shift to Mumbai in a rented apartment. In this case he can claim rent paid for the Mumbai Property as HRA exemption [u/s 10(13A)] along with deduction of interest and principal for the Pune property.
- Rent a home and avail higher deduction: There is good news to those who intend to buy a second home and rent the same as the amount of interest deduction on home loan which is capped at Rs. 2, 00,000/- in case of self-occupied property, is not applicable for the rented property. The same is illustrated below:
In the following cases it is assumed that the loan of Rs. 50,00,000/- is availed for a period of 20yrs @9.5%. In Case 1 the house is used for self-occupation. In Case 2, the house is rented out @20,000 per month. Deduction that can be claimed in the first year.
|Case 1||Case 2|
|Loan Amount (In Rs.)||5,000,000||5,000,000|
|No. of Years||20 years||20 years|
|Equated Monthly Installment (EMI) per month (In Rs.)||46,607||46,607|
|Amount repaid Annually (In Rs.)||559,284||559,284|
|Interest (In Rs.)||471,232||471,232|
|Principal (In Rs.)||88,052||88,052|
|Annual Rent Received @20,000 per month (In Rs.)||NIL||240,000|
|Less: Standard deduction of 30 % on Rental Income (In Rs.)||72,000|
|Taxable Income (In Rs.)||NIL||168,000|
|Less :Interest u/s 24 (In Rs.)||200,000||471,232|
|Deduction that can be claimed as Loss on House Property (In Rs.)||(200,000)||(303,232)|
Thus, tax benefits on home loan makes a case to avail home loan and buy your dream home.
Please note with effect from financial year 2017-18 Govt has restricted the limit of set off of loss from house property against other heads of Income to Rs. 2 Lakh. Till financial year 2016-17 there was no restriction and assessee was allowed to set -off any loss from house property against other heads of Income.
Please note the restriction is placed on set-off of losses and not on the amount of home loan interest that can be claimed as a deduction under Section 24 for a rented house property, the losses which could arise on account of such interest repayment can be set off only to the extent of Rs 2 lakhs. Such loss in excess of Rs. 2 Lakh can be carried forward for upto 8 Assessment Years succeeding the year of loss.
(Republished With Amendments)