Tax Saving On Your Home Loan: Part 1

How To Save Tax on your Home Loan?

The Home Loan is the only Financial product in India which smart people use to save tax every year. Other Debt products like Car Loans, Personal Loans and Credit Card debts don’t offer such kind of Tax Benefits. So it is very important that you understand all the Tax Benefits of taking a Home Loan. This will be very useful to you.

Tax Benefits on Home Loan -

There are basically two tax laws by which you can save tax on your Home Loan. I will explain you both of these tax laws here in very simple and easy to understand language so that you can understand the tax benefits of the home loan much better. These two rules are,

01) Section 80C

02) Section 24B

Well, in simple language, Section 80C is the tax deduction on the Principal of your home loan while Section 24B is the tax deduction on the interest payment of your home loan. The Income Tax Department treats both the Principal and the Interest differently for the purpose of the tax deduction. Here are both of these two laws.

Section 80C

Under this section maximum of Rs.100000(one lac) can be exempted from the Income Tax on repayment of principal on home loans.

Let me explain you this by giving various Examples.

Example: 1 If Your Taxable Income is Rs.400000 and your yearly home loan principal repayment is Rs.50,000 than your Total Taxable Income is Rs.350000.

Example: 2 If your Taxable Income is Rs.400000 and your yearly home loans principal repayment is Rs.100000 than your Total Taxable Income is Rs.300000.

Example: 3 If your Taxable Income is Rs.400000 and your yearly home loans principal repayment is Rs.200000 than still your Taxable Income is Rs.300000 because under section 80C, the Maximum limit of all such deductions is Rs.100000.

1. Principal Repayment can be considered as a valid investment under section 80Conly if it is made for a self occupied house. That is, you should be living in the house for which you are making the Principal Repayment.
2. If the house is not in the city in which you are working – in which case you can claim the principal repayment as an investment under sec 80C even if the house is not self occupied. For example, if you are working in Bangalore and have one house in Chennai for that you are paying the EMI, you can claim the Tax Benefitson the Principal Repayment even if the Chennai house is rented out.
3. If you have taken the home loan in joint name, the Tax Benefit (for both Principal Repayment and Interest Paid) would be available to both of you if the house is also in joint name.

Section 24B

Under this section maximum of Rs.150000(1.5 lac) can be declared as the interest payable on the Home Loans. As we have shown the examples, here as well the rule is same. You can exempt maximum of Rs.150000.

Income Tax exemption can be sought only once the construction is complete. You can seek Tax Benefits only from the financial year in which the construction is complete. There will be no deduction for the year in which the construction is still on as at the end of the year.

1. The interest payable for the pre-acquisition or pre-construction period would be deductible in five equal annual installments commencing from the year in which the house has been acquired or constructed.
2. The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under section 24(b).
3. In case the property is rented out even for a part of the year, there shall be no limit on this, and entire interest on Housing Loan is deductible under section 24(b).
4. The best part is that there is no restriction of “Self Occupied Property” for claiming the tax break on interest paid under sec 24. In fact, if you have rented out the house, and the rent you receive is more than Rs. 1.5 lacs per year, ALL interest paid (even if it is more than Rs. 1.5 lacs) is deductible from the rent received – provided that the interest paid is not more than the rent received.
5. If you are paying the EMI for 3 houses, you can claim interest paid for all the 3 houses under Sec 24 as long as it doesn’t exceed Rs. 1.5 lacs.

Summary:

Thus, Under Section 80C, you can avail a Maximum of Rs.1 Lakh of Tax Deduction on your Home Loan Principal and Under Section 24B, you can avail Maximum of Rs.1.5 Lakh of Tax Deduction on the Interest Payment of your Home Loan.

Thus, the Home Loan is the only Loan product that gives you so much tax benefits.