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How to use home loans most effectively for tax benefits

1) Deduction on interest: If you are paying EMIs for a home loan you took to buy a house, the interest component in the EMI can be claimed as deduction. You must be both an owner and a co-borrower (in the loan) to claim tax benefits. This deduction can be claimed starting the year in which the construction of the house is completed. Suppose the construction of your house was completed on August 30, 2014, you can claim deduction for interest for the entire 12 months in financial year 2014-15. So every year a maximum of Rs. 2 lakh can be claimed for a house that you use for your own residence. If your house is rented, the entire interest for the year can be claimed as deduction.

The interest payments for the year shall result in a loss under the head 'income from house property'. This loss can be adjusted against in the same year against other heads of income in your income tax return including salary. Therefore, it reduces your total taxable income and the tax you pay thereon. Assuming your interest outgo for financial year 2014-15 for a house you use for your own residence is Rs. 1.8 lakh, income under the head salary is Rs. 8.5 lakh, income from other sources (interest income) is Rs. 52,000 and your loss from house property is Rs. 1.8 lakh.

In such a case, your total taxable income will be Rs. 8,50,000 + Rs. 52,000 - Rs. 1,80,000 = Rs. 7.22 lakh.

2) Deduction on principal repayment: The component of your EMI which goes towards principal is eligible to be claimed under Section 80C of the Income Tax Act. You can sum up the outgo for the year towards principal and claim it. A maximum of Rs. 1.5 lakh can be claimed as deduction under Section 80C.

3) Deduction on stamp duty and registration charges: Besides the deduction allowed on principal repayment, payment made towards stamp duty and registration charges are also allowed to be claimed under Section 80C. However, these can only be claimed in the year in which these were paid.

4) Deduction on pre-construction interest: While deduction for interest can be claimed starting the financial year in which the construction is completed, you can also start claiming pre-construction interest from the same year. You need to add up the entire pre-construction interest and claim it in five equal installments. The total deduction, however, should not exceed Rs. 2 lakh when the house is being used by you for your own residence.

5) Deduction under Section 80EE: This section has been inserted to provide tax benefit to first time home owners where value of the house is Rs. 40 lakh or less and the amount of loan taken is Rs. 25 lakh or less. To be able to claim this deduction, the loan should have been sanctioned between April 1, 2013 to March 31, 2014. A maximum deduction of Rs. 1 lakh is available under this section and can be claimed in financial years 2013-14 and 2014-15 spread over these two years or in any one year. The total deduction allowed under Section 80EE cannot exceed Rs. 1 lakh. This section lapses in the current financial year 2015-16. So, if you meet all the conditions laid out in Section 80EE, do remember to claim the deduction while filing your tax returns for financial year 2014-15.

There is a benefit on principal repayment under Section 80C, but there is more to it…

 When Manish took the home loan to finance his apartment in Chennai, there was a monthly EMI of Rs.42,000 that it entailed. His advisor told him that each month this EMI of Rs 42,000 gets split into the interest component and the principal component. Typically, in the initial years of the loan the interest component is higher while in the later years of the loan, the principal component is higher. As per the bank loan statement, in the first year, the interest component will work out to approx Rs.30,000 per month while the principal component will work out to Rs.12,000 per month. That works out to a total principal repayment of Rs.1,44,000 per year which can be claimed as a deduction under Section 80C. Additionally, the registration charges and stamp duty paid for the property are also eligible for deduction under Section 80C. The way he should time his purchase is that the house registration is done in the Jan-Mar quarter so that he can claim full deduction of registration and stamp duty subject to a maximum limit of Section 80C limit and only in the financial year in which it is incurred. Then he can claim the full principal from next year. In fact, if he is planning to invest in PPF, he can postpone that by 2-3 years since Section 80C will be fully covered by the principal component of home loan itself. There is one more thing to remember here. The treatment of principal on home loan remains the same irrespective of whether the property is self-occupied or rented out. There is one important point to remember here. If the property is sold before a period of five years then the Section 80C benefits claimed over the last five years will be treated as taxable income in the hands of the assesse in the year in which the property is sold.

 Treating interest on home loan; when it is self-occupied property… 

Every assesse can show one property as self-occupied for tax purposes. In your IT returns, you can show income on house property as zero and show the entire interest up to Rs.200,000 per annum as a loss and adjust that against your taxable income. In the above example, you will pay Rs.360,000 as interest component on your home loan and against that you can get Rs.200,000 as exemption under Section 24 of the Income Tax Act. Considering that you are in the peak tax bracket, your rebate is over 30% on the interest paid. An interesting point to remember here is that the rebate under Section 24 is available on an accrual basis and not on an actual payment basis. 

Treating interest on home loan; when it is let out property… The treatment is slightly different when the property in question is let out. In that case, there will be no limit for exemption under Section 24 and the limit of Rs.200,000 will not hold any longer. Of course, you will have to show the higher of the fair rental value or the actual rent received as income on the house property. But there is no limit on the amount of interest on loan that you can claim as an exemption. In the above example, the entire interest component of Rs.360,000 can be claimed as deduction in the case of let out property. In fact, the idea here is that if you are planning to let out your property then you can opt for a shorter tenure loan of 10 years instead of 20 or 25 years so that you can get higher exemption as anyways there are no limits on exemption on interest paid on home loan. 

Buying property and taking home loan in single versus joint names… While taking a home loan you can either go for a home loan in your name or in the joint names of yourself and your spouse. If your spouse is an earning member then you can apply for loan in joint name which will entitle you for a higher loan amount. Additionally, this limit of Rs.200,000 can be claimed individually by you and your spouse when you file your tax returns making it doubly tax efficient. 

Miscellaneous facts about taking a home loan…
 There are some additional points to remember. If you are a first time home buyer, then you are eligible for an additional deduction of Rs.50,000 under Section 80EE subject to the loan being sanctioned during the financial year 2016-17. While there is no income eligibility for Section 80EE, it is subject to the maximum cost of the house being Rs.50 lakh and the maximum loan being Rs.35 lakh. Additionally, Section 24 benefit is available only if the construction of the house is completed within five years of the end of the FY in which the loan was availed. Pre-construction interest is available separately as a deduction in equated instalments over a period of five years. 

Manish gleaned the following key points from the discussion… •    You can claim tax exemption under Section 80C on principal repayment up to a maximum limit of Rs.150,000 per annum. •    You can claim tax exemption under Section 24 on interest payment up to a maximum limit of Rs.200,000 per annum •    Section 24 is claimed on an accrual basis while Section 80C benefit can only be claimed on an actual payment basis. •    If you are going for a home under Rs.50 lakh value in this year, you can get an additional exemption of Rs.50,000 u/s 80EE for interest paid, provided you are a first time home buyer.



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