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How can a home loan help one save on his taxes?

IndianMoney.com Research Team | Updated On Saturday, May 05,2018, 12:49 PM
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How can a home loan help one save on his taxes?

A home is considered a once in a lifetime investment. True financial planning involves not only planning for the purchase of the house but also availing of the tax deductions in order to speed up the process of loan repayments. Housing is a sector which the Government maintains a prime focus on. Low cost housing and providing all citizens of India a roof over their head is one of the main agenda’s of the Government .If one is purchasing a house, repairing his house or renovating the house a tax benefit can be availed. So how can one avail of tax benefits in order to save on the home loan?

What are home loans?

  • Home loan is financed by banks to buy or repair/renovate a house. Home loans are provided based on the market value, mainly estimation given by banks or the registration value of the property. Banks do not consider other charges like Stamp Duty, Registration Charges while considering the home loan
  • Home loans are repaid through monthly installments (EMI) spread over 20 years. Some of the banks provide housing loans for a tenure extending up to 25 - 30 years

Why does one take a home loan?

One can avail a loan for the construction of his house. Loan is available for the construction of a new home on a said property. The documents that are required in such a case are slightly different from the ones submitted for a normal Housing Loan. If one has purchased this plot within a period of one year before starting construction of the house, most HFCs will include the land cost as a Component, to value the total cost of the property. In cases where the period from the date of purchase of land to the date of application has exceeded a year, the land cost will not be included in the total cost of property while calculating eligibility.

What is a home improvement loan?

These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan facility, after obtaining the requisite approvals from the relevant building authority.

What are the taxation aspects for a home loan?

  • Home loan Equated monthly installments have two components Principle and interest. These two are treated separately for the purpose of taxation
  • The repayment of the principle amount of the loan up to INR 1 Lakh per annum is eligible for a tax deduction under Section 80 C. One is eligible for a deduction under this section irrespective if one stays on the property or gives it out for rent.
  • The amount one pays as stamp duty when a house is bought and the amount one pays for the registration of the documents of the house can be claimed as deductions under section 80C up to INR 1 Lakh.
  • Under Section 24 one gets a tax deduction on the interest portions up to an amount of INR 1.5 Lakhs .If the property is self occupied then this is the maximum deduction one can avail .If ones property is let out or deemed to be let out then the entire interest portion one pays on the home loan can be claimed as a deduction against the rental value or the deemed rental value .If one lets out his property then the actual amount paid as interest is eligible for a deduction. There is no maximum limit. This translates to be very useful when one stays in a self occupied house and gives the other house on rent.
  • If one takes a loan for the purpose of reconstruction, renovation or the repair of one’s property then under Section 24 (b) the amount of deduction is restricted to INR 30000.One can claim this deduction irrespective of whether one is residing in the house or has given it on rent

Let us consider the following example in order to understand tax savings on a home loan. Mr Ramesh earns a salary of INR 7 Lakhs per annum. He takes a loan of INR 35 Lakhs for a tenure of 20 years. The rate of interest charged on the home loan is 10.25%.The EMI is INR 34,358 per month or a yearly value of INR 4,12,290

 

Gross salary

INR 7 Lakhs

Loan amount

INR 35 Lakhs

Tenure

20 years

Rate of interest

10.25%

EMI (Yearly)

INR

4,12,290

 

Principal (Yearly)

INR 56,129

Interest (Yearly)

INR 3,56,162

 

Table showing the yearly loan breakup

 

Year

EMI (Year)

Principal (Year)

Interest (Year)

O/S Balance

1

4,12,290

56,129

3,56,162

34,43,871

2

4,12,290

62,160

3,50,130

33,81,712

3

4,12,290

68,839

3,43,451

33,12,872

4

4,12,290

76,236

3,36,054

32,36,636

5

4,12,290

84,428

3,27,862

31,52,208

6

4,12,290

93,501

3,18,790

30,58,707

7

4,12,290

1,03,548

3,08,743

29,55,160

8

4,12,290

1,14,674

2,97,616

28,40,485

9

4,12,290

1,26,997

2,85,293

27,13,488

10

4,12,290

1,40,643

2,71,647

25,72,845

11

4,12,290

1,55,756

2,56,534

24,17,089

12

4,12,290

1,72,493

2,39,797

22,44,596

13

4,12,290

1,91,028

2,21,262

20,53,568

14

4,12,290

2,11,555

2,00,735

18,42,013

15

4,12,290

2,34,288

1,78,003

16,07,726

16

4,12,290

2,59,463

1,52,827

13,48,262

17

4,12,290

2,87,344

1,24,946

10,60,919

18

4,12,290

3,18,220

94,070

7,42,698

19

4,12,290

3,52,415

59,875

3,90,284

20

4,12,290

3,90,284

22,007

0

Mr Ramesh invests INR 1 Lakh per annum in a public provident fund in order to avail deductions under Section 80 C of the income tax act. The tax liability of Mr Ramesh can be calculated as follows :

Salary of Mr Ramesh

INR 7,00,000

Less deduction under tax saving instruments

INR 1,00,000

 

INR 6,00,000

Calculation of Mr Ramesh’s tax liability if no home loan has been taken

Slabs

Rate

Tax liability

INR 0 - 2,00,000

0

0

INR  2,00,000-5,00,000

10%

INR 30,000

INR 5,00,000-6,00,000

20%

Mr Ramesh pays 20% of INR 1 Lakh = INR 20,000

Net Total

 

INR 50,000

Education Cess

3%

INR 1,500

Total tax liability  without a home loan

 

INR 51,500

If Mr Ramesh avails no tax deductions on his home loans he pays an income tax of INR 51500.

Now let us calculate Mr Ramesh tax liability after taking a home loan

  • Interest portion deductible up to INR 1,50,000 per annum under Section 24
  • Actual interest paid in the first year = INR 3,56,162
  • Deduction available is only a maximum of INR 1,50,000 irrespective of actual interest paid.

Mr Ramesh earns INR 7 Lakhs per annum. In addition to the deduction of INR 1 Lakh on the tax saving instruments (PPF) an additional deduction of INR 1,50,000 per annum is available on the interest component of the EMI of the housing loan. This translates to INR 600000-INR 1,50,000= INR 450000.

Calculation of Mr Ramesh’s tax liability if a home loan has been taken

Slabs

Rate

Tax liability

0 -2,00,000 (INR)

0

0

2,00,000-4,50,000 (INR)

10%

INR 25,000

Net Total

 

INR 25,000

Education cess

3%

INR 750

Total tax liability  with a home loan

 

INR 25,750

Mr Ramesh saves INR 51,500 – INR 25,750 or a net saving of INR 25,750 if he avails deductions under Section 24 on the interest component of the home loan.

Tax paid without availing home loan benefits

INR 51,500

Tax paid after  availing home loan benefits

INR 25,750

Net saving on tax after taking a home loan

INR 25,750

There is a famous saying “ Home is where the heart belongs” .One can not only buy his own home but also save on tax .This is a double bonanza one can get. Think…Twin benefits..One’s own house as well as tax benefits.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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