21 March 2024 | By INDIE
Have you thought that your home loan can be your best tax-saving buddy? Yes, you heard it right! It saves you money on taxes and helps you build an asset that grows in value at a low interest rate.
But wait, the real question is, are you optimising the loan amount and tenure for maximum benefit?
So, how can you take advantage of your home loan for tax benefits? Let's take a closer look.
Let’s understand the benefits with an example.
Ramesh recently bought a property worth ₹1 Crore. He got a bank loan worth 85% of the property's value at an 8.6% interest rate for 30 years. The monthly EMI he has to pay is ₹65,960.
The loan EMI is divided into two parts - interest and principal. Initially, the interest component is higher, while the principal component is higher in later years. He can claim the principal repayment of ₹1.5 lakhs per year as a deduction under Section 80C.
Also, the registration charges and stamp duty paid for the property are eligible for deduction under Section 80C.
You can't sell the property for five years after you get it to get this deduction. If you sell it before that time, any deductions you got before will be counted as taxable income in the year you sell it.
You can save on your income tax by showing one property as self-occupied. By doing this, you can show the income from your house property as zero and claim the entire interest paid on your home loan as a loss, up to ₹2,00,000 per year. This can be adjusted against your taxable income, which means more savings in your pocket!
In Ramesh’s case of home loan EMI of ₹ 65,960 per month, the interest component would add up to ₹7,91,520 per year, and he can claim up to ₹2,00,000 as an exemption under Section 24 of the Income Tax Act.
If you’re from the highest tax bracket, that's a rebate of over 30% on the interest paid! And here's a fun fact: the rebate under Section 24 is available on an accrual basis, not on an actual payment basis.
What's interesting is that you get this tax break based on the interest you are supposed to pay during the year, not the interest you actually end up paying. So, even if you haven't paid the interest yet, but it's due in that year, you can still get the tax benefit. It's like getting a discount on your tax bill for the interest that you owe, not just what you've already paid.
If you're renting out your property, you'll be glad to hear that there's no limit on the interest you can claim as an exemption. The sole drawback is that you'll need to provide proof of either the higher fair rental value or the actual rent received as income on the house property.
Suppose you took a loan of ₹40,00,000 over 20 years with an interest rate of 9% per annum. In the first year, the interest component would be around ₹3,60,000. You can now deduct the whole ₹3,60,000 in interest if you are renting out the home.
If you and your partner are sick of paying hefty income taxes, here's a trick to assist. You can benefit from separate principal and interest deductions by taking out a larger house loan combined. This implies you may claim a total deduction of ₹3 lakh under Section 80C and ₹4 lakh under Section 24B, which can drastically lower your tax bill.
To make the most of this method, consider a bigger house loan of ₹60 lakh with a shorter 15-year term. This allows you to save more on taxes while paying off your loan faster. Please bear in mind that all applicants must be co-owners of the property to claim these deductions.
To sum up, taking advantage of the tax breaks offered through your home loan is an excellent way to save money. Knowing which deductions you may claim can help you lower your tax bill and ensure your financial future.
To get the most out of your home investment, you must be aware of the potential tax benefits and apply them carefully. With these strategies, you can make your house loan work for you and have a better financial future. So go ahead and invest in your ideal home, knowing that it is a sensible move for both present and the future.
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