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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
Also Read – How to retire early in India?
How much tax we can save on Home Loan?
Home Loan Tax Benefit-Budget 2018-19 – 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 go 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 2018-2019-2020
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.
So, enjoy the home loan tax benefit and congratulations for having your dream home.