In this article I am writing about the Home Loans and how to get the maximum benefits on Tax Savings. If you are not aware, Home Loans are the best source for Tax Savings plan. You cannot use Car Loans, Personal Loans or any other loans for the Tax Savings plan. But, still many people not aware of how to utilize the potential of use this plan. We will look into this article on rules and regulations you must know before planing the Home Loans and getting the Tax Benefits. Please post your feedback on the comments section. I would be happy to answer all your questions. You can subscribe to our future articles here.
Tax Limitation on Home Loans
Income Tax act 1961, provides two section where you can use home loans for the Tax Savings purpose. The two sections are :
- Section 80c
Under this section maximum of Rs.100000(one lac) can be exempted from the Income Tax on repayment of principal on home loans.
- Example 1
If your Taxable Income is Rs.500000 and your yearly home loans principal repayment is Rs.80000, then your Taxable Income is Rs.500000 – Rs.80000 = Rs.420000.
- Example 2
If your Taxable Income is Rs.500000 and your yearly home loans principal repayment is Rs.100000, then your Taxable Income is Rs.500000 – Rs.100000 = Rs.400000.
- Example 3
If your Taxable Income is Rs.500000 and your yearly home loans principal repayment is Rs.140000, then your Taxable Income is Rs.500000 – Rs.100000 = Rs.400000. Because you can exempt maximum of one lac under this section.
- Other savings
Note that under this section (80c) you can show other savings like Public Provident Fund (PPF), etc. Maximum limit Rs.100000 includes all the savings. If you are declaring Rs.100000 as the principal payment, then you can not include other savings.
- Section 24b
Under this section maximum of Rs.150000(1.5 lac) can be declared as the interest payable on the Home Loans. As we have shown the examples, here as well the rule is same. You can exempt maximum of Rs.150000.
Points to Consider while computing Income Tax on Home Loans
- Income Tax exemption can be sought only once the construction is complete. You can seek Tax Benefits only from the financial year in which the construction is complete. There will be no deduction for the year in which the construction is still on as at the end of the year.
Income Tax Policies on Principal Repayment
- Principal Repayment can be considered as a valid investment under section 80C only if it is made for a self occupied house. That is, you should be living in the house for which you are making the Principal Repayment.
- If the house is not in the city in which you are working – in which case you can claim the principal repayment as an investment under sec 80C even if the house is not self occupied. For example, if you are working in Bangalore and have one house in Chennai for that you are paying the EMI, you can claim the Tax Benefits on the Principal Repayment even if the Chennai house is rented out.
- If you have taken the home loan in joint name, the Tax Benefit (for both Principal Repayment and Interest Paid) would be available to both of you if the house is also in joint name.
Income Tax Policies on Interest Repayment
- The interest payable for the pre-acquisition or pre-construction period would be deductible in five equal annual installments commencing from the year in which the house has been acquired or constructed.
- The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under section 24(b).
- In case the property is rented out even for a part of the year, there shall be no limit on this, and entire interest on Housing Loan is deductible under section 24(b).
- The best part is that there is no restriction of “Self Occupied Property” for claiming the tax break on interest paid under sec 24. In fact, if you have rented out the house, and the rent you receive is more than Rs. 1.5 lacs per year, ALL interest paid (even if it is more than Rs. 1.5 lacs) is deductible from the rent received – provided that the interest paid is not more than the rent received.
- If you are paying the EMI for 3 houses, you can claim interest paid for all the 3 houses under Sec 24 as long as it doesn’t exceed Rs. 1.5 lacs.
Few Examples would help to understand
Kamalan bought a house in Bangalore and staying that house. He got the loan amount of Rs.1000000 for that house. He is also working in the Bangalore city. His yearly Principal Repayment is Rs.100000 and Interest Repayment is Rs.40000.
- He can save total of Rs.140000(Rs.100000 + Rs.40000) since he is occupied that house and also staying in the same city.
Later he bought another house in the Chennai and took another Home Loan of Rs.1200000. He then started paying the EMI for that loan amount. He opted to rent out that house. His Principal Repayment is Rs.110000 and interest payable is Rs.50000 per anum.
- He is eligible to show the Principle Repayment under the Tax Savings. Please note that the maximum amount he can show as the Principal Repayment is Rs.100000. In this case even if the rule permits him, he already repaying the principal of Rs.100000 for the Bangalore house. So, he already reaching the maximum limit.
- But, in the case of rent payable, there is no limit on Tax Savings. It is because he rented out the house. This rules under section 24b. When you are applying for Home Loans and proposing that the house will be given for rent, you will be eligible for no limit on interest payable under Tax Savings.
Some of the terms used in the Home Loans:
- EMI: Equated Monthly Installment till the loan is paid back. It consists of a portion of interest and the principal
- Floating Rate of Interest: Rate of Interest which varies with the market lending rate. This means that there is an element of risk of paying more than budgeted amount in case the lending rates goes up
- Monthly Reducing Balance: In this system interest reduces monthly with repayment of Principal amount
- Annual Reducing Balance: In this system principal is reduced annually at the end of the year so you end up paying interest even for the portion of principal you have actually paid back
- Fixed Rate of Interest: Rate of Interest remains unchanged throughout the period of the loan
- Processing Charge: It’s a fee payable to the lender on applying for the loan
- Prepayment Penalties: When loan is paid back before the agreed term of the loan, then banks/ institutions charge penalty for the prepayment
- Commitment Fee: Some institution charge commitment fee in case the loan is not availed within a stipulated period, after it is processed and sanctioned
- Miscellaneous Cost: It is quite possible that some lenders may charge documentation or consultant charges .
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The above write up is very comprehensive on Home Loans and Tax Savings. The facts are taken from many sites and I used different resources to check the accuracy. This post will be very useful for the people who want to invest on properties and get the Benefits of Income Tax. I might have missed few points and I will update the post if I come across. You can post it in the comments if there is any mistakes. You can subscribe to our RSS feeds.
If you have any queries on Home Loans and Tax Savings, please drop a comment with your mail id, I will contact you with the details.