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Last Updated : Jan 30, 2017 09:02 AM IST | Source:

How to use home loans effectively for tax benefits

While there is one EMI payable to repay home loan, one must take into account the principal and the interest to enjoy tax benefits.

Anil Rego
Right Horizons

Manish Mehta had recently acquired a property worth Rs 55 lakh in the outskirts of Chennai which had been financed by one of the prominent banks to the extent of 85 percent of the value of the property. He is aware that buying a house on loan is a tax efficient proposition but he is not aware of the nuances of how best he can leverage his home loan for tax benefits. He has read through the relevant sections pertaining to Section 80C and Section 24, but he is yet not clear how it will work out in totality for him. Manish, therefore, approaches his tax advisor to educate him on how best he can use his property for tax purposes. Here are the 5 rules that the advisor gives Manish…

There is a benefit on principal repayment under Section 80C, but there is more to it…

When Manish took the home loan to finance his apartment in Chennai, there was a monthly EMI of Rs.42,000 that it entailed. His advisor told him that each month this EMI of Rs 42,000 gets split into the interest component and the principal component. Typically, in the initial years of the loan the interest component is higher while in the later years of the loan, the principal component is higher. As per the bank loan statement, in the first year, the interest component will work out to approx Rs.30,000 per month while the principal component will work out to Rs.12,000 per month. That works out to a total principal repayment of Rs.1,44,000 per year which can be claimed as a deduction under Section 80C.

Additionally, the registration charges and stamp duty paid for the property are also eligible for deduction under Section 80C. The way he should time his purchase is that the house registration is done in the Jan-Mar quarter so that he can claim full deduction of registration and stamp duty subject to a maximum limit of Section 80C limit and only in the financial year in which it is incurred. Then he can claim the full principal from next year. In fact, if he is planning to invest in PPF, he can postpone that by 2-3 years since Section 80C will be fully covered by the principal component of home loan itself. There is one more thing to remember here. The treatment of principal on home loan remains the same irrespective of whether the property is self-occupied or rented out. There is one important point to remember here. If the property is sold before a period of five years then the Section 80C benefits claimed over the last five years will be treated as taxable income in the hands of the assesse in the year in which the property is sold.

Treating interest on home loan; when it is self-occupied property…

Every assesse can show one property as self-occupied for tax purposes. In your IT returns, you can show income on house property as zero and show the entire interest up to Rs.200,000 per annum as a loss and adjust that against your taxable income. In the above example, you will pay Rs.360,000 as interest component on your home loan and against that you can get Rs.200,000 as exemption under Section 24 of the Income Tax Act. Considering that you are in the peak tax bracket, your rebate is over 30% on the interest paid. An interesting point to remember here is that the rebate under Section 24 is available on an accrual basis and not on an actual payment basis.

Treating interest on home loan; when it is let out property…

The treatment is slightly different when the property in question is let out. In that case, there will be no limit for exemption under Section 24 and the limit of Rs.200,000 will not hold any longer. Of course, you will have to show the higher of the fair rental value or the actual rent received as income on the house property. But there is no limit on the amount of interest on loan that you can claim as an exemption. In the above example, the entire interest component of Rs.360,000 can be claimed as deduction in the case of let out property. In fact, the idea here is that if you are planning to let out your property then you can opt for a shorter tenure loan of 10 years instead of 20 or 25 years so that you can get higher exemption as anyways there are no limits on exemption on interest paid on home loan.

Buying property and taking home loan in single versus joint names…

While taking a home loan you can either go for a home loan in your name or in the joint names of yourself and your spouse. If your spouse is an earning member then you can apply for loan in joint name which will entitle you for a higher loan amount. Additionally, this limit of Rs.200,000 can be claimed individually by you and your spouse when you file your tax returns making it doubly tax efficient.

Miscellaneous facts about taking a home loan…

There are some additional points to remember. If you are a first time home buyer, then you are eligible for an additional deduction of Rs.50,000 under Section 80EE subject to the loan being sanctioned during the financial year 2016-17. While there is no income eligibility for Section 80EE, it is subject to the maximum cost of the house being Rs.50 lakh and the maximum loan being Rs.35 lakh. Additionally, Section 24 benefit is available only if the construction of the house is completed within five years of the end of the FY in which the loan was availed. Pre-construction interest is available separately as a deduction in equated instalments over a period of five years.

Manish gleaned the following key points from the discussion…

•    You can claim tax exemption under Section 80C on principal repayment up to a maximum limit of Rs.150,000 per annum.
•    You can claim tax exemption under Section 24 on interest payment up to a maximum limit of Rs.200,000 per annum
•    Section 24 is claimed on an accrual basis while Section 80C benefit can only be claimed on an actual payment basis.
•    If you are going for a home under Rs.50 lakh value in this year, you can get an additional exemption of Rs.50,000 u/s 80EE for interest paid, provided you are a first time home buyer.

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First Published on Jan 30, 2017 09:02 am
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