Buying a house is usually one of the biggest decisions in one’s life. For most Indians, home ownership is associated with pride and is seen as the ultimate yardstick to prove one’s social worth. And why not, considering the amount of trouble a home buyer has to go through in realising his or her dream.
With the high property prices, it is becoming increasingly difficult for the salaried class to buy a house on their savings alone. Hence, almost everyone needs a home loan.
While it is a large liability which causes considerable financial strain resulting from large payment commitments, your home loan also gives you tax benefits. But before you take the plunge you are advised to assess your ability to repay and sustain the payments for a long tenure. Understanding how it impacts your finances can go a long way in making your home loan work for you!
How tax benefits are estimated:
The Indian Income Tax Act makes you eligible for a tax deduction under Section 80C up to Rs 1.5 lakh on principal repayment. Additionally, Section 24 (of the same Act) allows deductions on the interest you pay on the loan. This is limited to Rs 2 lakh (for a self-occupied property), while the maximum interest amount that can be claimed as deduction under Section 24 is unlimited for property you own but have let out to a tenant.
Let’s take a look at the tax implications in two cases under two different scenarios. Single v/s joint loan in a self-occupied house and actually rented property v/s notional rent under let-out property.
For the sake of uniformity and better understanding, we keep the property price at Rs 1 crore, rate of interest @ 9.50% and tenure as 15 years. The EMI is considered as Rs 1,04,422 (interest paid per month at Rs 79,166 and principal paid per month at Rs 25,255)
What you should do for a self-occupied property:
You are entitled to a maximum benefit of Rs 2 lakh interest deductions as per the I-T Act, irrespective of the interest paid, while the total limit under Section 80C allows you a total deduction of Rs 1.5 lakh. However, some awareness before opting for a loan may cut down on your tax outgo to a considerable extent.
Smart tip: Opt for a joint home loan
The table below explains why:
If both you and your spouse are working then going ahead with a joint home loan makes more sense. We often make this mistake and hence miss out on half of what’s available. Opting for a joint loan not only enhances the eligibility of your home loan application, but also increases the combined tax benefits -- making it double.
You can claim a combined deduction of Rs 3 lakh under Section 80C. Even the total tax deduction on the interest repayment of your home loan goes up to Rs 4 lakh from Rs 2 lakh. However, you can avail of the aforementioned tax benefits only after the possession of the property. The tax treatment of loan taken for under-construction property is not the same as for one taken for ready-to-move properties.
In case you are already paying regular EMIs for an under-construction property, you cannot claim any deduction for principal repayment till construction is over. Fortunately, the benefit of deduction is available for interest component, but that too only from the year in which construction gets over. But even then, you still get to claim for all the interest paid during construction years.
How you can benefit when you rent out your house:
There are many home buyers who avail of a loan to buy a house, but continue to stay in a rented place. The reasons could be many-- affordability, convenience, etc. They can’t buy a house in the area they are currently residing and hence choose a distant destination, but at the same time do not want to disturb their everyday life set up, such as children’s school. Besides the workplace is also nearer. Thus, they continue to stay in rented premises and keep their property lying idle.
Smart tip: Let out your property on rent, instead of keeping it lying vacant.
In case of a let-out property, the tax law differs. Whether you have actually rented a property or not ( a notional rent in this case), your annual rent received is entitled to a standard deduction of 30% as per the I-T Act, which is over and above the interest paid on a loan.
Actual rent received is the 'real' rent (money) you receive from a tenant occupying your property, while notional or deemed rent received is the potential rental value of a property, whether you have put it on rent or not. For such properties, you are liable to pay tax on the deemed or potential rental income from the property.
Additionally, the maximum interest allowed for deduction is the actual interest incurred in the year. Thus, there is no limit on the interest amount that can be claimed as a deduction.
Hence, it makes more sense to actually rent out your property. By doing so, despite the tax liability, you are at least getting some cash flow in the form of a rent, which is missing in case of a vacant property (notional rent).
An important point to note here is that in case your rental income from the house property is less than the amount of interest paid for the year, it results into a net loss (from house property). This can be set off against any other income arising out of any other heads mentioned as per the I-T Act (income from salary, house property, capital gains, other sources, business or profession). If the loss has been carried forward, it can be deducted from income under house property up to 8 years. This is common for both the scenarios.