In India, buying a house is a milestone. It signifies ‘having arrived’ and one derives tremendous sense of security from the purchase of a
house. Apart from the emotional benefits, there are tax benefits to be enjoyed as well on purchase of a house. And this applies not only to the first house but also to some additional property that you may purchase. The tax benefits may change with the new Direct Tax Code being proposed.
Further with interest rates on loans going down and property prices also coming down, it would make good sense to invest in a house to live in. If you and your spouse are both working then there are double tax benefits to be availed by taking a home loan.
When you take a home loan and start paying the EMIs (Equated Monthly Installments), there are two components to it – One is the principal that you are repaying and the second the interest. On both of these, there are tax deductions available.
- Principal: Under the Section 80C you can avail a deduction of upto Rs.1 lakh from the taxable income on principal amount being paid every year. However, if there are other deductions you are claiming like EPF or PPF, insurance premia etc, deduction against the principal will be reduced by that amount.
- Interest: Under Section 24(b), interest component of the EMI also is eligible for deduction from taxable income. If this loan is on a house that you are presently occupying then this is limited to Rs.150,000 every year. If however this is on a property that you have let out or not residing in, then the entire interest payment is eligible for deduction.
- This deduction is allowed from the year the property is purchased or from the year the construction of the property is completed. The interest payments incurred before the start of the financial year in which either the property is bought on completed construction is allowed as a deduction from that year onwards upto a total of 5 years. The amount allowed is 1/5 of the total each year. The ceiling of Rs.150,000 included this interest amount as well.
- Further if you own the property, against which a home loan has been taken jointly with your parent, child, spouse or sibling then both of you can claim Rs.150,000 each as interest deduction . The ceiling of Rs.150,000 does not apply if the property is not self occupied, then you can claim the entire interest paid as a deduction.
So when you are evaluating the pros and cons of either taking a loan or prepaying a loan, you need to consider the effectiveness of the loan post the taxation angle.
For example you have an option of a home loan of Rs.10 lakhs @10.5% for 15 years. This is on a property that is self occupied.
If you are in the highest tax bracket and you get a deduction on the interest and the principal amounts, your rate of interest works out to approximately 7%.
So remember to evaluate a home loan with the tax benefits and then take your decision whether to take the home loan or prepay it as may be the case.
For InvestmentYogi by Shweta Jain, Certified Financial Planner, International Money Matters