Many people think of a home loan as the most tax-effective loan. In fact, a sizeable number of home loan borrowers must have availed home loans because they had excess cash in hand by way of a bonus. But, is it wise to take a home loan just because your friends, doctor or grocer has advised you to do so?
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Let’s say you already are repaying a home loan, but decide to invest a windfall gain in a second home. Why not prepay the existing home loan? Just because you think you will lose out on tax benefits you don’t do so? Hence, you not only continue with the existing home loan, but as if the burden were not enough, you avail a second home loan. How wise is this decision? It is not very wise. It might actually disrupt your financial position.
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There is no denying that availing a home loan brings with it attractive tax benefits. Let us see what the tax benefits are on a Home Loan:
Home Loan EMIs: An EMI has two components: Principal and Interest.
Home Loan repayment has tax benefits, but it doesn’t make your home loan free. Tax benefits only reduce the home loan cost to a certain extent.
Let us say you have availed a Home Loan whose details are:
Tax deduction under Section 80C is not exclusively for principal repayment. There are many other investments and expenses which can be claimed under the Section. These are EPF contributions, PPF contributions, life insurance premium, children’s tuition fees, and so on. But, the maximum amount that can be claimed under Section 80C is limited to Rs 1,50,000 a year. So, for many home loan borrowers, Section 80C is not a savior. Hence, you may not be able to get the full benefit of Principal repayments under Section 80C.
Do a cost benefit analysis. See how much tax benefit you are losing when you consider other eligible investments. Are you getting any real tax benefits on principal repayment? If yes, you may resist prepaying your home loan. If you are not enjoying any real tax benefits, it is time you prepay your home loan. At least the home loan outstanding will come down.
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The rules of claiming tax deductions on interest payment for home loans are different for self-occupied property and let-out or deemed to be let-out property. You can see in the above example that interest payout is high in the initial years. Therefore, in case of a high value loan (above Rs 50 Lakhs), the interest payment goes beyond Rs 2,00,000, which is the maximum limit of deduction allowed under Section 24(b).
For example, interest for the first year is Rs 2,48,934.36. This is a small loan amount; still, you cannot enjoy the entire tax benefit. In case of huge loan amounts, the scenario would be worse. Remember, if you plan well, you’ll be in a position to make the best use of the tax benefits. You can even avail a joint home loan. If your spouse is working, you can avail a joint home loan. The tax benefits also double.
You and spouse can jointly claim Rs 3,00,000 under Section 80C on Principal repayment each year and Rs 4,00,000 on interest repayment under Section 24(b) each year. You can claim tax benefits on home loan repayment to the full extent if you have availed a small ticket home loan (A home loan of a lesser amount). High value home loans can be availed jointly to enjoy full tax benefits.
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