Purchasing home can reduce your tax liability — here's how
Both interest and principal repayment of home loan fetches you tax shelter.
Taking a loan for buying your dream home, can help you significantly reduce your tax liability. Every component of your EMI (Principal + Interest) has it’s attached tax benefit. Let’s understand each in detail-
Tax benefit on repayment of Principal Amount:
But, the benefit has a caveat attached to it. If you have claimed deduction under this section, then you can’t sell your house before 5 years from the end of the financial year in which it was purchased. If you sell it before 5 years, then the entire principal amount which was claimed as deduction u/s 80C is reversed and you have to pay tax on the total amount of deduction availed.
Tax benefit on interest:
You will get benefit of interest component of EMI under section 24 of Income Tax. However, if you had taken a loan between F.Y. 2016-17, then you would have enjoyed an additional benefit of Rs. 50,000 on housing loans interest under section 80EE.
Took home in April? Don’t worry, Section 24 is still there for you.!
Now, let’s see how you can take the maximum tax benefit on interest under section 24.So, first you have to see the purpose for which you would be using this home. Whether you would be staying (Self occupied Property) or Renting (Lent Out property) it.
In case of self-occupied property(SOP), if the loan is taken for purchase or construction of house property then the maximum available tax benefit on interest is up to 2 lakh. This means that you can claim the maximum amount of Rs. 2 lakh, as interest paid towards home loan to your bank, in your ITR (Income Tax Return) in one year. Thus, it will reduce your taxable income and in some cases, even the tax slab!
NOTE- Exemption is not available for the property that is under construction: Income tax department doesn’t allow deduction of payment of interest until the possession taken or construction completed. However, it gives you benefit of Pre-Construction interest, in 5 equal installments. These installments starts only after the completion of construction or the year in which possession has been taken and only one fifth of it can be claimed each year. The pre-construction interest is included within the overall limit of Rs. 2 Lakh which has been specified for a self occupied house.
In case of Let-Out Property (LOP), if the loan is taken for purchase or construction of house property then the entire interest is available as deduction.
However, if the loan is taken for repair or reconstruction of both (LOP and SOP) property then the maximum tax benefit one can take is of Rs.30,000 only.
Now, moving on to another aspect.
Let us clear out the confusion that you might be having in-case of let out property after Budget 2017-18 (Finance Act, 2017). Till F.Y. 2016-17, there was no restriction on the amount of set-off of loss on House Property. But from F.Y. 2017-18, you can set off the loss from house property till the limit of 2 Lakh although you can still claim the entire interest for deduction i.e. remaining amount will be carried forwarded. For instance, you’ve received rent of Rs.10 lakh and paid interest on home loan of Rs.15 lakh in F.Y. 2017-18, now there is loss on house property of Rs.5 lakh. So, from this Rs 5 lakh, only Rs 2 lakh would be allowed to set off from other incomes and the remaining Rs 3 lakh will be carried forward to the next year.
Taken all the available deductions under section 80C & 24?
Well in this case, it’s better to have loan burden on two shoulders!
Yes applying for loan in joint names is much more beneficial than the loan applied on single name. Not only it will give you double tax benefit but also lower your burden by splitting it with your partner. Let’s understand with example-Suppose Rahul and his wife take a joint loan of Rs. 40 Lakh with equal shareholding and both are in higher tax Bracket of 30%. The loan is taken for 20 years and the interest rate is 8%. Hence their maximum combined tax exemption is of Rs. 7 Lakh each year (assuming each having maximum exemption of 1.5 lakh u/s 80C and Rs 2 lakh u/s 24). if only Rahul had taken the loan, he would have had a tax deduction benefit of Rs. 3.5 Lakh. But by applying for joint loan, they are able to get an additional benefit of 3.5 Lakh.
The above three Sections (With Quantum of Deduction) relating to tax benefits on Home Loans have been summarised as under:-
Note - [However, there is limit of set off of Rs. 2 lakh from F.Y. 2017-18]The writer is co-founder of Tax2win