Home Loan Tax Benefit – Section 24, 80EE and 80C

How do I get home loan tax benefit? What if I have purchased a second house − Am I still eligible for housing loan tax benefit? What are the home loan tax benefits if I wish to go for joint/construction linked loan?

First of all,before going into the home loan tax benefit details, let us understand what Home Loan is and what you should keep in mind before taking a Home Loan.

What is Home Loan – Definition and Process

Home Loan is a loan given to a person in helping him buy a house. You cannot think of buying a home without a Home Loan in the current market condition. Home Loan will help you in reducing your tax liability along with creating an asset. You must be careful in going for a Home Loan because it can create problems for you at a later stage. Given below are some areas, where you have to be careful.

Home Loan Tips and Tricks for First Time Buyers

Things to consider before taking home loan in India

1. You should decide the loan amount based on your repayment capacity, though the lender may be ready to offer you more. Please make sure that the Equated Monthly Instalment (EMI) is within 40% of your net salary. This is because you have to provide for other financial goals in life, along with repayment of the Home Loan. It is better to go for insurance cover equal to the loan amount as will make  sure, your legal heirs will continue to stay in the house in case of your untimely death before the Home Loan is fully repaid.
2. If the value of the property is above Rs. 20 Lakh, you can get up to 80% of the value of the property as a loan. It is 90% if the value is less than Rs. 20 Lakh. So you should plan for the remaining 20% or 10% as the down payment. If possible, avoid other costly loans along with Home Loan to arrange for the down payment. It is better to save for 3-5 years and accumulate enough for the down payment. You can invest in Debt Mutual Funds, Balanced Funds or bank RDs for accumulating money for down payment.
3. Floating Rate Loans and MCLR are now popular with customers. But be ready for any change in interest rates. If the interest rates go up as in 2011, you will find it difficult to pay the higher EMI. Let us see how it affects you:

In the case of a Home Loan of Rs. 20 Lakh given at the rate of 8.5% for a 20-year term, the EMI works out to Rs. 17,356. If the interest rate is increased by 1% to 9.5% after 1 year, you have 2 options. Pay the increased EMI of Rs. 18,599 for the balance 19 years or pay the same EMI of Rs. 17,356 for a further period of 57 months. You will stand to benefit if you go for higher EMI instead of extending the duration of the loan.

4. If your wife is also a tax payer, it is advisable to go for a Joint Home Loan, because she can also have home loan tax benefit up to Rs. 1.5 Lakh in a year.
5. RBI and National Housing Bank have instructed all banks and housing finance companies to stop charging penal interest on pre-closure of Home Loan under Floating Rates. It is better to pre-close the Home Loan and make your home debt-free. But don’t discontinue your investment towards other goals like retirement, children’s education to pre-close the Home Loan.
6. Earlier, Home Loans were based on Prime Lending Rate of the banks. Now, Home Loans are based on the Base Rate and MCLR, which is more transparent. Banks allow existing customers to opt for the new structure by charging a small fee. You have to do a cost benefit analysis before applying for this. Switching Home Loan to a new bank will be beneficial in some cases.
7. If you are taking a Home Loan from your relatives or friends, you cannot claim the home loan tax benefit under Section 80C for the principal repayment, but you can still claim tax benefits for the interest paid on the loan.

While applying for a Home Loan, please keep the above points in mind to avoid future complications.

 

A house to stay in is a dream for all of us. But,the high cost of land and the high rate of interest on housing loan are creating problems to the dreams of many. Now that the interest rates are on the decline and real estate prices are almost stagnant, many home buyers are planning for a housing loan. You may be eligible for a housing loan, because of your decent job and salary. But you have to prove your capacity to repay to the lender by submitting the necessary documents.What are the documents required for housing loan by SBI, HDFC, ICICI or any other bank?

Documents required for Housing Loan – Salaried Employees

If you are in a good job, you are lucky to have the least documentation for a home loan. You have to give enough proof to support your income, age etc. Please see the below given list to know the documents required for housing loan for salaried employees:

1. Housing Loan Application of the Lender with your photograph
2. Your Identity, Residence and Age proof
3. Pay Slips for the last 3 months
4. Bank Statement for the last 6 months
5. IT Returns or Form 16 issued by your employer
6. Cheque for the Processing Fee

Most banks are offering even online facility to process your application. If you are a customer of the bank, they will even sanction you a pre-approved housing loan, subject to certain conditions.

Home Loan Documents for Self Employed Professional

If you are a self employed professional, you have to submit more documents than the salaried class as given below:

1. Housing Loan Application of the Lender with your photograph
2. Your Identity, Residence and Age proof
3. Proof of Educational Qualification
4. Proof of Business existence
5. Copy of Shop & Establishment Licence, VAT Registration or any other mandatory Licence / Registration
6. Copy of Advance Tax paid / Self Assessment Tax paid challan
7. Bank Statement for the last 1 year (both Savings and Current Account)
8. Last 3 years IT Returns with computation of income
9. Last 3 years audited Balance Sheet and Profit & Loss Account
10. Cheque for the Processing Fee

The extra documents required for this category is to ascertain the repayment capacity of the customer, based on his income from profession.

Home Loan for Self Employed Eligibility – Non-Professional

Loans to this category will be sanctioned after a more careful scrutiny and there is a requirement of more documents. The following documents are required for housing loan in this category:

1. Housing Loan Application of the Lender with your photograph
2. Your Identity, Residence and Age proof
3. Educational Qualification proof
4. Business profile
5. Proof of Business existence
6. Copy of Shop & Establishment Licence, VAT Registration or any other mandatory Licence / Registration
7. Copy of Advance Tax paid / Self Assessment Tax paid challan
8. Bank Statement for the last 1 year for both Savings and Current Account
9. Last 3 years Income Tax returns with Computation of Income
10. Last 3 years audited Balance Sheet and Profit & Loss Account
11. Cheque for the Processing Fee

Home Loan for NRI in India – Documents Required

Non Residents are having peculiar documents to be submitted for housing loans as given below:

1. Salary Certificate from the Non Resident Employer mentioning name as in Passport, Date of Joining, Passport number, Designation and latest Salary and Perquisites, in English
2. Passport copy with valid Residence Visa page
3. Salary Slips for the last 3 months / Salary Certificate (If variable components like overtime & incentives are reflected, then six months’ salary slips are required)
4. For Self Employed Individuals, documents evidencing currently in business like Trade Licence, Registered Power of Attorney or Agreement with Sponsor etc.
5. Work Permit / Labour Contract copy / Photocopy of Identity Card or any other Proof of Work / Employment issued by concerned Govt. authorities
6. The income documents for salaried should be attested by Embassy official, if documentary evidence like bank statement for credit salary or frequent remittance of fund to India is not available
7. Copy of all overseas bank statements for the last 6 months, if any
8. Copy of NRE / NRO bank statement for the last 6 months
9. Power of Attorney (POA), if applicant is not available in India for signing of documents

Housing Loan – An emerging segment

With high real estate prices, one cannot think of buying a house without a housing loan. Since it is a secured loan, the banks are not very strict in this. You can get around 80% of the value of the house as housing loan, provided you have the repayment capacity. Another important criteria is your credit score. If your CIBIL score is not good, your Loan Application may be rejected.

An understanding on the documents required for housing loan will help you in getting a speedy loan to buy that dream house.

How much tax we can save on Home Loan?

Home Loan Tax Benefit-Budget 2017-18 – Was a no-event for people waiting for an additional deduction on Principal or Interest component.

Home Loan Tax Benefit-Budget 2016-17 – Additional Rs. 50,000 deduction had been allowed, for first- time home buyers, under Section 80EE.

Home Loan Tax Benefit – Budget 2014-15

• Increase in deduction limit on Interest on Home Loan for the self-occupied property from Rs. 1.5 Lakh to Rs. 2 Lakh
• Increase in deduction limit on Principal on Home Loan from Rs. 1 Lakh to Rs. 1.5 Lakh (under Section 80C)

Most of us now are looking at investments in real estates, as a better option. If you speak to anyone, who has invested in a real estate property in the past 10 years, they will explain how the value of their flat is doubled or even tripled in a couple of years!

Yes, real estate as an asset-class is gaining momentum among investors. Whatever said and done, you require a house of your own. You can have a second property as an investment if your budget permits the EMI for a Home Loan.

Another major benefit of investment in property is the huge home loan tax benefit

Let us see how it works for you?

If you are going for a flat worth Rs. 50 Lakh, you will be eligible for 80% of the cost as a Home Loan, provided you have the income to support the EMI and your credit score is good. Let us see the factors in the Home Loan.

In this case, you may get 80% of Rs. 50 Lakh i.e. Rs. 40 Lakh as a loan. If you are opting for a 20-year term, the Equated Monthly Instalment (EMI) will be Rs. 39,935, assuming the interest rate of 10.5%.

Home Loan Tax Benefit – How the EMI works?

In the EMI of Rs. 39,935, there are 2 components – Principal and Interest. In the initial years, the Principal component will be negligible because the Interest component will be very high. After repaying the 12 EMIs, the outstanding loan will be Rs. 39,37,843, because only Rs. 62,157 will be repaid as Principal, while Rs. 4,17,063 goes towards Interest! Slowly, the Interest component will come down and the Principal will increase. At a later stage of the loan, the Interest component will be less.

Home Loan Tax Benefit – Section 80C

Home Loan tax Benefit can be divided into 2 components:

• Principal component in EMI
• Interest component in EMI

The Principal and Interest component in EMI will get different tax benefits.

Income Tax Benefits on Home Loan – Principal Component

You are eligible to claim tax benefits under Section 80C for the Principal repayment of a Home Loan. You can claim deduction up to Rs. 1.5 Lakh along with all other permissible instruments like Life Insurance premium, PPF, ELSS, NSC, etc.

You are eligible for this benefit only if the loan is for a self-occupied house. But if you are staying in another city for a job and have a house in another city, then you can claim this benefit even if the house is not self-occupied.

Interest on Housing Loan Deduction for AY 2017-2018-2019

Section 24 of Income Tax Act

Under Section 24 of the IT Act, you can claim deduction up to Rs. 2 Lakh in a year for the Home Loan interest paid. The limit of Rs. 2 Lakh is applicable only for the self-occupied house. If you are going for a second house, you can claim the actual interest paid as a deduction. The limit of Rs. 2 Lakh is not applicable here.

Income Tax Rebate on Home Loan for Under Construction Property

If the loan is construction-linked and if you are paying only pre-EMI Interest, there is a change in the way you get tax benefits.

Pre-EMI Interest is not eligible for the home loan tax benefit, at the time of payment. But you can claim this in 5 equal installment after the construction of the house. The total interest paid at this stage can be claimed in 5 equal installments starting from the year in which you get possession. But please note that the limit is fixed at Rs. 2 Lakh in a year in this case also.

If you pay EMI before occupation of the house

In this case, you will not get any benefit under Section 80C for the Principal repaid before the occupation of the house. You can claim the home loan tax benefit under Section 80C only from the occupation.

For Interest paid before the occupation, you will not get the tax benefits immediately. But the total Interest paid before occupation can be claimed in 5 equal instalments from the year in which you get the occupation. But the limit per year is Rs. 2 Lakh.

Joint Home Loan Tax Benefit 2017

Though the tax benefit is limited to Rs. 1.5 Lakh under Section 80C and Rs. 2 Lakh in Section 24, you can get more benefits, if you go for a Joint Home Loan along with your spouse. If you go for a Joint Home Loan with your spouse in the ratio of 50:50, then both of you can claim these benefits separately. So the limit will be Rs. 3 Lakh in Section 80C and Rs. 4 Lakh in Section 24. This can reduce your cost of loan considerably.

Prepayment of home loan or continue the EMI is a question everyone faces after buying a home on loan. Is prepayment of home loan a good or a bad option? Whether to prepay in early years or later stage of loan?

Rajiv is expecting an incentive of Rs. 5 Lakh in May this year. He started thinking on how to utilise this amount effectively for the benefit of his family. He is thinking of prepayment of Home Loan. Since he is enjoying the tax benefits for the Home Loan, will it be good for him to close the loan? Can he invest this elsewhere and generate better returns instead of prepayment of Principal in the Home Loan.

Is Prepayment of Principal a good option in the Home Loan?

Not always, because you must decide based on many other parameters. If you are paying an interest rate of 10% on your Home Loan and if you are availing Income Tax deduction for this interest, your actual cost of loan will be 7% only, if you are in the 30% tax bracket. But, if you are in the 20% tax slab, your cost of loan will be 8%, and if you are in the 10% tax slab, your cost of loan will be 9%.

Will you prepay the Home Loan Principal?

If your cost of the loan is 7%, will it make sense to prepay the Principal? If you can invest the amount elsewhere and if it can generate return in excess of 7%, you will stand to gain by not prepaying the Home Loan. But, if you cannot invest and get such returns, it is better to prepay the Principal. For those who can follow strict investment discipline, it will be better for them to continue the EMI and invest the amount for better returns.

Charges on Prepayment of Home Loan

RBI has asked banks to stop levying foreclosure charges and prepayment penalties on floating rate home loans.

Prepayment is better in the early years of the loan

Interest part is higher in early years of home loan.

Let us take an example:

Loan Amount: 30 Lakh, Loan Term: 20 years, Rate of Interest: 10%, EMI: Rs. 28,951.

In the first year, you will be paying an amount of Rs. 3,47,412 by way of 12 EMIs. Out of this, only Rs. 49,642 is adjusted towards repayment of Principal because an amount of Rs. 2,97,770 is adjusted towards Interest by the lender. If it is a self-occupied house, you are eligible for tax deduction on only Rs. 2 Lakh in a year. In such cases, it is better to prepay the Principal.

Suppose you are repaying Rs. 5 Lakh Principal after paying 12 EMIs, after this, your outstanding Principal will be Rs. 24,50,358. In this case, your number of future EMIs will reduce from 228 to 147. As a result,You can close the loan around 7 years earlier than proposed. This is a huge benefit for you. In this case, your Interest payment in the next year will be around Rs. 2.4 Lakh and you can still get the full amount of deduction towards Interest paid. Here, you will be saving a huge interest outgo. But, if you want to reduce EMI and retain the original term of the loan, then the revised EMI will be Rs. 24,049, a reduction of Rs. 4,902 from the original EMI.

What about Prepayment at later stages of the Loan?

In the example given above, suppose the party paid the EMI for 15 years and only 5 more years are left. Let us see the effect of prepayment of Rs. 5 Lakh. After 15 years of EMI, the outstanding Principal will be Rs. 13,62,573. If you prepay Rs. 5 Lakh at this stage, the outstanding loan will be Rs. 8,62,573. This will help you in closing the loan in the next 34 months instead of 60 months, a savings of 26 months.  Please compare this with the reduction of 7 years in the term of loan, if you prepay during the early part of the loan.

But the house will be yours, if you close the loan early

Yes, you will have the satisfaction of having the home debt-free, if you prepay the Home Loan and transfer the home in your name as per the records of the lender.

So, enjoy the home loan tax benefit and congratulations for having your dream home.

Though we have tried to cover almost everything about home loan tax benefit here,Please feel free to ask if you have any queries regarding home loan tax benefit.