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Tax Benefits on Home Loan

    IndianMoney.com Research Team | Tuesday, December 23,2014, 04:20 PM
 

avail-a-home-loan-and-save-on-your-taxes

It is the festive season. You have just spotted the house of your dreams. A bank is offering home loans at competitive rates. This is the opportunity you have been waiting for.

Yes..... you also get tax benefits when you avail a home loan.

avail-a-home-loan-and-save-on-your-taxes

What are home loans?

You can avail a home loan from a bank or a housing finance Company to buy, construct, repair or renovate your house.

Understand how you can save on your tax availing a home loan

You are 30 years of age and earn INR 12 Lakhs a year. You stay in a rented house in Kolkata paying INR 25000 as rent.

You have availed a home loan of INR 40 Lakhs for tenure (time period) of 20 years. You pay an interest on the home loan at 11%.

Your home loan break up

Year

EMI(Year)

EMI Principal (Year)

EMI Interest (Year)

O/S Balance

1

495450

58,333

437,117

3,941,667

2

495450

65,084

430,366

3,876,583

3

495450

72,615

422,835

3,803,968

4

495450

81,018

414,432

3,722,950

5

495450

90,393

405,057

3,632,557

6

495450

100,853

394,597

3,531,704

7

495450

112,524

382,926

3,419,180

8

495450

125,545

369,905

3,293,635

9

495450

140,073

355,377

3,153,562

10

495450

156,282

339,168

2,997,280

11

495450

174,367

321,083

2,822,913

12

495450

194,544

300,906

2,628,369

13

495450

217,057

278393

2,411,312

14

495450

242,174

253276

2,169,138

15

495450

270,199

225251

1,898,939

16

495450

301,466

193984

1,597,473

17

495450

336,351

159099

1,261,122

18

495450

375,273

120,177

885,849

19

495450

418,699

76,751

467,150

20

495450

467,150

28,300

0

Your salary slip

 

Before tax exemption
(INR)

After tax exemption
(INR)

Basic Salary

6,00,000

6,00,000

Dearness allowance

23,000

23,000

House Rent allowance

3,00,000

62,300

Medical reimbursement

25,000

10,000

Transport allowance

12,000

2,400

Hostel allowance

10,000

10000

Children's education allowance

5,000

5000

Bonus

147740

147740

Provident Fund

74760

74760

Professional tax

2,500

2500

Total

12,00,000

9,37,700

Your fully taxed allowances

  • Basic salary is fully taxed.
  • Dearness allowance is fully taxed.
  • Bonus is fully taxed.

Your partially taxed allowances

There is a rule which you need to know to calculate your House Rent Allowance.

  • The HRA (House Rent Allowance) given to you by your Company.....Condition 1
  • The actual rent you pay - 10% * (Basic salary + Dearness allowance).....Condition 2
  • 50% of (Basic Salary + Dearness allowance) in case you reside in a Metro City and 40% of (Basic Salary + Dearness allowance) if you reside in any other city.....Condition 3

You have to pay tax on the actual HRA received from the employer minus the amount which is the least among the above three conditions.

Condition 1

  • You get a HRA of INR 300000 as part of your salary.

Condition 2

  • You pay INR 300000 rent a year – 10% (INR 600000 +INR 23000) = INR 237700

Condition 3

You stay in Kolkata
50% of (Basic Salary + Dearness allowance)
=50% (INR 600000 + INR 23000) = INR 311500.

The least among the following = INR 237700
You have to pay tax on INR 300000 – INR 237700 = INR 62300
 

Medical reimbursement

  • Exempt up to INR 15000 a year. You pay tax on the remaining amount of INR 10000.

Transport allowance

  • You get a tax exemption up to INR 9600.You pay tax on INR 12000 – INR 9600 = INR 2400.

Hostel allowance

  • It is exempt up to INR 300 a month for 2 children. You are unmarried hence full INR 10,000 is taxed.

Children’s education allowance

  • It is exempt up to INR 100 a month for 2 children. You are not married and the full INR 5,000 is taxed.

Provident Fund

  • Your contribution is fully tax deductible under Section 80C up to INR 150000. Hence INR 74760 is fully deducted.

Professional tax

  • Assuming Professional tax is paid by the employer, it is first shown in gross salary and then deducted under section 16 (iii).

Your taxable salary after availing exemptions is INR 937700.

You can avail further tax deductions by using your home loan

Gross salary

INR 12  Lakhs

Loan amount

INR 40 Lakhs

Tenure

20 years

Rate of interest

11%

EMI (Yearly)

INR 495450

EMI Principal (For the first year)

INR 58333

EMI Interest (For the first year)

INR 437117

Deductions under Section 80 C

  • Your repayment of the principal amount of the home loan (EMI Principal) up to INR 1.5 Lakh per annum is eligible for a tax deduction under Section 80 C.
  • You repay (EMI Principal) of INR 58333 for the year and avail a deduction for this amount.
  • You get a deduction of INR 74760 on the EPF under Section 80 C of the income tax act.
  • You invested INR 1 Lakh in a PPF and got only INR 16907 as a deduction because you had already availed deductions on the EMI (Principal) of the home loan and the EPF.

Tax saving instruments

Amount

EMI (Home loan Principal)

INR 58333

Deduction for the EPF under Section 80 C

INR 74760

Deduction for the EPF under Section 80 C

INR 16907

Total

INR 1,50,000

Deductions under Section 24 B

  • You get a deduction of INR 2 Lakhs per year on the home loan (EMI Interest) if your property is self occupied.
  • You pay an interest of INR 4,37,123 and can avail a deduction of only INR 2 Lakhs on this amount.

Individual Tax Payers up to the age of 60 years: (Male/Female)

Annual Income (INR)

Tax Rate

0 -  2,50,000

Nil

2,50,001-5,00,000

10 %

5,00,001-10,00,000

20 %

Above 10,00,000

30 %

You have to pay a total education cess of 3%.

Your salary - deductions

Heads

Amount

Gross taxable salary

INR 937700 (A)

Less : Investments in a EPF (Section 80 C)

INR 74760 (B)

Less : EMI contribution to Home Loan
Principal (Section 80 C)

INR 58333 (C)

Less : Investment in PPF (Section 80 C)

INR 16907 (D)

Deductions under Section 24 B

INR 200000 (E)

Less : Professional Tax under Sec 16(iii)

INR 2500 (F)

Total taxable income

INR 585200(A) – (B+C+D+ E+F)

Your tax calculations

Heads

% of Income Tax

Income Tax

Up to INR 250000

Nil

Nil

INR 250001–INR 500000
Income tax is paid on
INR 2.5 Lakhs.
(INR 500000 – INR 250000)

 10%

INR 25000 (A)

INR 500001 – INR 585200
(INR 585200 – INR 500000)

20%

INR 17040 (B)

Total tax

 

INR 42040 (A + B)

Education cess @ 3%

3% of 42040

INR  1261 (C)

Net tax payable

 

INR 43301 (A+B+C)

Your taxable salary after availing home loan deductions and other Section 80 C deductions is INR 43301.So learn tax benefits of home loan.

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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