We often see home loans as a big financial burden and shy away from taking loans while purchasing property. However, home loans come with a host of financial benefits. Let’s see how Mr. Mehta benefited from taking a home loan.
Mr. Mehta is a Mumbai based lawyer who wanted to purchase a house. He was in a dilemma, deciding between taking a home loan and using his savings to make the purchase. Eventually he opted for a home loan as its benefits outweighed the liabilities.
Here is how Mr. Mehta benefited from taking a home loan:
1. Tax Benefits on Home loan:
One of the primary benefits a home loan offers is tax benefit. Home loan EMI is divided in to two parts; Interest payment and Principal repayment. Home loan tax benefits are linked to these two components with different tax treatment.
Interest payment: Under section 24 of Income Tax Act, deductions on interest payments are available for purchase, construction, repair and reconstruction of property.This means you can claim tax benefit not only on interest payments every month, but also on the mentioned costs, incurred within the financial year. Also, processing fee paid at the time of taking loan or pre-payment penalty paid for premature closure of loan can be clubbed with deductions on interest payments. Maximum deduction under Section 24 for self occupied property is Rs. 1.5 lakhs (increased from 1.5 lakhs to 2 lakhs in budget 2014) and there is no limit for let out properties, deductions are available for actual figures in the financial year.
Principal repayment: Under Section 80 C of Income Tax Act, you can avail deductions on principal repayment in the financial year. However, the maximum deduction under this section is Rs. 1 lakh (increased from 1 lakh to 1.5 lakhs in budget 2014) which is clubbed with EPF, insurance premiums, school fees, ELSS, NSC etc. Also, you can club deductions on stamp duty and registration fee only for the financial year within which the property was purchased. Do keep in mind that deductions on principal repayments are valid only if the property is self occupied and not let out. Further, all deductions are reversible if the property is sold within 5 years of purchase. Deductions claimed during the period before selling property will be treated as income for the financial year in which you sold it and you will need to pay tax on that. So by taking a home loan, Mr. and Mrs. Mehta collectively saved 5 lakhs on their tax payments! Since his spouse was a co-applicant in the loan, she too availed tax benefit; as both applicants are separately eligible for interest and principal exemption while computing tax. To avail tax benefit on home loan, attach your repayment schedule along with your tax return and show total payment towards principal and interest components of EMI separately. The rest can be taken care of by your CA.
2. Home Loan Helps Build a Good Credit Score:
By taking a home loan, Mr. Mehta opened a new chapter of discipline in his financial life, creating the base for a good credit score. Since most of the home loans are a long term loans, it gives longevity to build a credit history. Home loans help build a good credit score as it is generally believed that individuals with home loans are financially disciplined. Thus, CIBIL (Credit Information Bureau of India Limited) usually favors individuals with home loans by rewarding them with a high CIBIL Score.
3. Legal Verification of Documents by Bank:
As soon as you apply for a loan, the banks arranges for a detailed due diligence process. This involves a thorough verification of builder’s/seller’s background, the property papers and related details. Once a bank is involved, you can be doubly sure about the market value of property and authenticity of papers.
“When a bank approves a loan on any property, it is a marketable stamp of approval. So tomorrow when I want to sell my house it’s easier”, Mr. Mehta added.
Even though home loans are a form of financial burden, they can prove to be steady financial investments as well. So next time while buying property, do follow the footsteps of Mr. Mehta and take a home loan to finance your purchase.
Here are a few common queries about tax benefits on home loans:
1. Can I avail tax benefit if I take loan from friends or relatives?
Yes. Tax benefit can be claimed against a certificate provided by them. However, recipient of the certificate will be liable to pay tax on interest income received from you. Also, you will be able to claim tax benefit only on interest payments. Only those loans taken from notified institutions are eligible for tax deductions on principal payments.
2. I have borrowed money for the renovation of my house. Can I claim tax deduction on that?
Yes! You can claim a tax deduction of up to Rs. 30,000 on the interest paid. However, this benefit can be availed only if the house is occupied by you.
3. Can I get tax benefits on a land purchase loan?
No, you cannot. However, if you take a composite loan for land and house construction, then you can avail tax benefits after completion of construction.
4. Will I continue to get IT benefits after switching my home loan to another bank?
Yes! You will continue to get IT benefits even after you switch your home loan. However, if you have taken a top-up loan after switching, you will not be eligible for IT benefits on the top-up amount.
5. Can I claim HRA benefits, while my wife claims IT benefits on our home loan?
No. If you are staying with your wife in the property for which she is claiming IT benefits, you cannot claim HRA benefits on the same loan.
6. Can I claim HRA benefits if I stay in my own house?
No, one cannot enjoy the tax benefits of own house with HRA, as one cannot pay rent to oneself. Hence, whole of HRA received becomes taxable under “Income from Salary”.
7. Can I pay rent to my parents or spouse and avail HRA benefits?
You can pay rent to your parents and avail HRA benefits. However, they will need to account for the same under ’Income from other sources’ and will have to pay tax on it. You cannot pay rent to your spouse. In view of the relationship, this transaction will not bear merit under tax laws. This will be seen as a bogus transaction, leading to scrutiny from IT dept.
Do you have more queries? Feel free to ask us in the comments section below! Meanwhile, use the calculator below to see how much you can save by switching your home loan to a lower interest rate.
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