Home loan helps save on income tax
Apr 05, 2014
Source : The Times of India

 

BANGALORE: The deduction you can claim against the payment of interest on a home loan from your taxable income is a major saving. This is especially so as the interest component is higher than the principle amount in the initial years of the home loan tenure. The amount of interest paid can be availed as a deduction under Section 24 of the Income Tax Act under the head ‘Income from House Property' while assessing the total income for the year.

The interest paid on a home loan is deductible from the rental income of the property too. When the house is let out, the entire interest on the home loan can be deducted from the rent received without any ceiling on the amount. However, in case of a self-occupied property, the amount of interest deductible is restricted to Rs 1.50 lakhs or the actual interest paid, whichever is lower. This can be set-off against other incomes – salary, income from business etc, whereby the tax liability reduces.

When the house is self-occupied, the interest deduction can be claimed only after the house is completely constructed. Further, interest paid in the pre-construction period can also be claimed as a deduction in five equal installments, in succeeding assessment years after completion of construction.

Apart from deduction of interest paid from the taxable income, repayment of the home loan (principal amount) can also be claimed as a deduction under Section 80C of the Income Tax Act subject to some conditions.

They are:

• The construction of the house must be completed in the previous year.

• Income must be generated from a property which is taxable under the head ‘Income from House Property’ or it is deemed income from a house property according to Section 23(2) of the Income Tax Act.

• The amount of benefit is restricted to Rs 1 lakh (as the maximum deduction under Section 80C to Section 80CCE cannot exceed Rs 1 lakh). The other amounts which also qualify under this Section are payment of life insurance premium, contribution to Provident Fund, purchase of NSC etc, the overall limit for all these including repayment of home loan is Rs 1 lakh.

‘Loss from property’ can be written off

Loss from a house property arises due to claiming deduction against maintenance charges, and interest on the home loan from the rental income. If the sum of these two elements is higher than the rent received, it results in a loss. This amount can be set-off against other incomes – salary, income from business etc.

The loss from house property can be set-off against any income (salary, business income, other sources of income like interest on FD or capital gains) of the current assessment year. If the entire loss cannot be set-off in the same assessment year it can be carried forward to the next eight assessment years. However, the amount of loss carried forward can then be set-off only against ‘Income from House Property’ and not against any other income in the subsequent years.

Some factors to consider for prospective borrowers

Apart from considering the tax advantage while taking a home loan, these factors also have to be borne in mind:

• Identification of the property

• Title to the property

• Earning and repayment capacity

• Initial margin money which is has to be paid

It is desirable and advantageous to think of buying a house at a younger age as the repayment capacity will be better as there will not be any other major commitments such as children’s education, major healthcare expenses etc. Availing a home loan at a young age will also inculcate financial discipline and you can become debt-free sooner, well before retirement.

Making a financial plan

A financial plan varies from person to person – needs, commitments, returns on investments, insurance cover (both life and medical), the availability of funds/resources (investible money) etc. A financial plan and investments should be made keeping in view various factors. The investments should have a mix. They should be both long-term and short-term, and should also bring you the advantage of capital appreciation.

Short-term investments are needed for liquidity – in case of immediate requirement or an emergency.

The long-term investments you plan can comprise real estate.

How it works

Rent received: Rs 2 lakhs

Less: 30 percent standard deduction – maintenance charges: Rs 60,000 Interest paid: Rs 1,50,000

Total: Rs 2,10,000

Loss from house property: Rs 10,000

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