Income tax is one of the gravest concerns of an earning individual based in India. However, relaxation on a certain amount of this tax is possible thanks to several loan and engagement schemes. One such option is to get a home loan approved. While home loans make up for an individual’s dream residence, it is also necessary to check out the details before finalising one. Applying for and getting a home loan approved in haste is never a good decision. Of all the reasons possible, it can become financially draining and no individual wants to live in his dream home like that. The housing loans are categorised under various schemes curated by banks as well as the government. This is to facilitate people from all sections of life to be able to apply for a place of their own.
Home Loan and Income Tax
Before zeroing down on home loans as a solution to exempt yourself from paying a large amount of the income tax, it is important to consider a few pointers. Listed below are some of them that might be useful before finalising anything in a haste.
Tax benefits and banes
Real estate purchases are essentially prioritised thanks to their tax-saving facilities. Low-interest rate is one attraction of course but there are also some particulars about getting an optimum amount and tenure. With a home loan ongoing, you can save up to a maximum of 1.5 lakh every year according to the Income Tax Act of 1961. However, the presence of different avenues and the various tax benefits available on them can zero down tax savings on home loans to a meagre amount.
Again, the benefit of tax saving of this amount and scheme can only be availed if you are a registered payer who is also associated with repaying a home loan. Therefore, the yearly outgo of interest is a major deciding factor of how much you will be saving. Both are directly proportional to each other. Simply put, the higher the interest rate you avail, your tax-saving is likely to be on the increasing side.
Comparison of interest rates
If better tax saving is one of your priorities besides getting a place of your own, an amount stretched over a long tenure can be one of the solutions. A combination of these two aspects allows you to avail maximum possible tax savings. However, looking at the benefit is not our only job.
It is important to note that while a long tenure might ease out your issue of a high-income tax, it might be expanding your interest outgo. Thus, you are very likely to end up in a situation where you will be paying an interest outgo higher than the principal loan amount. Our purpose is to avail as many savings as possible. Thus, to encash on this aspect, one must go for a thorough comparison of interest rates. The interest rates specified by banks on housing and home loans is essentially lower than the other loan schemes. A comparison of all net interest rates provided by different banks will help you finalise the best one. This, in turn, will enable you to strike a balance between savings as well as the payment of optimum amounts during the final period.
Busting the common myth
A common myth regarding the concept of home loans is that a high principal amount is bound to increase your tax savings. This is absolutely irrelevant and also illogical as the maximum amount that one can save under interest payments issued under the following Section 24B is Rs 2 lakhs only. The principal amount for which the loan is taken is unlinked and it is mostly dependent on the interest rate associated with the loan. Thus, the interest outgo that is more than the amount specified by the government, will not be beneficial in saving you from paying high taxes.
Short tenures over long tenures
While long tenures are highly satisfying for those willing to repay their loans without haste, some people might not find it comfortable. This is because a long tenure corresponds to an extended period of payment and this is an issue irrespective of the saving made on the income tax. Thus, a short tenure with a comfortably low-interest rate is one of the best combinations a borrower can get. Longer tenure also corresponds to a higher interest outgo and we here, are concerned about maximising the savings.
How to save tax on a housing loan – Key Pointers
Here are some of the key pointers that you must keep in mind if planning to save on income tax with a housing loan:
- For a first time buyer, under the Section 80EE of the Income Tax Act, an applicant is eligible to save up to Rs.50,000 on the total interest payment of their home loan. This deduction can be reclaimed every year until the entire loan is paid back completely.
- According to Section 24 of the Income Tax Act, a borrower is capable of saving up to Rs.2 Lakh on the total interest rate to be paid on their home loan. However, the deduction is applicable for fully constructed houses within the past 5 years.
- Applicants who are buying a house as an investment and will not be living there in person, under Section 24 are also eligible for saving tax interest payment of their home loan in full amounts. However, the interest of their housing finance will be deducted from the monthly rent they receive from that particular house.
These are some of the pointers that you should consider before finalising a housing loan to increase your savings. Exemptions from paying a high-income tax can be availed thanks to a variety of avenues other than housing loans. This includes getting approved medical claims for your family as well as the senior citizens, having school fees to be paid for your children and so on. Thus, if it is not an urgent need, you can always look for these other options for availing of the income tax benefits and savings.
