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Home Loan Tax Rebates – Do they actually save – Find out

In our culture, people believe that a new home is more than a new asset – it is an auspicious milestone, that brings good fortune to the family. The tax breaks announced by the government recently, ensure this holds true – you can save more than ₹3.5 lac with the help of your Home Loan! Want to start your house hunt on an auspicious note? Read on to understand how to maximise these Tax Savings using your Home Loan…

Let’s Go Over a Few First Principles:

The government taxes your income at a certain rate. But till a certain amount, your salary / income is tax-free and you pay tax on the balance amount. Now the government wants to encourage you to buy your dream home.

So What Does It Do?

Exempt you from tax on the amount you pay as your EMI up to a certain amount. Now by increasing this Home Loan related tax-exemption, your effective Tax-free income increases – leading to zero effective income tax in many cases. Let’s get to the numbers…

Tax Bonanza on Your Home Loan

The loan is repayable via Equated Monthly Installments (EMIs) for the time you want to service the debt. It’s a no brainer that the EMI is made up of principal and interest. You would be glad to hear that you can save taxes on both under different sections of the Income Tax Act in a financial year.

Hold On! There are Ifs & Buts in Section 80C & 24

You can save tax upto ₹1.5 lakh on the principal payment under Section 80C as stated above. But there’s a possibility of losing the same. Yes, if you sell a property within 5 years of buying the same, the deduction you might have claimed earlier will be added back to the income in the year of sale.

On the other hand, the maximum tax savings of ₹2 lakh on interest is applicable when you live in the home for which you have taken the loan. If you put it on rent, there’s no maximum limit. Sounds good, isn’t it? However, there’s a catch here. The maximum limit for the overall loss under the head of ‘House Property’ is restricted to ₹2 lakh only. You can claim a deduction from the year in which the construction of the house is completed.

Shall You Buy an Under-construction Property?

Home loans are also there to help you buy you an under-construction property. You can repay the loan dues easily as the EMI includes only interest till the time the construction is on. Plus, there are tax benefits on buying such a property. You can save taxes on interest paid between the period of loan sanction and the completion of house construction in five equal installments after gaining possession.

Do You Get Tax Breaks on Stamp Duty & Registration Fees?

Section 80C not only allows you to save tax on the principal amount but also the stamp duty & registration fees you pay to buy a home. You can save upto ₹1.5 lakh on these payments. However, you can claim the benefit only in the year in which you pay these fees. You can even claim a tax deduction on the home loan processing fee under Section 2 (28A) of the IT Act.

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Tax Calculation

The permissible tax breaks are first subtracted from your gross annual income. Taxes will thus be levied on the resultant sum.

An example below will help you understand better.

Let’s consider an example to understand tax mathematics better.

Example – You earn ₹8.5 lakh (Gross) a year and apply for a home loan worth ₹40 lakh for 20 years at an interest rate of 8.60% per annum. The first year will see the interest and principal repayment of ₹3,40,948 and ₹78,650, respectively. You can claim ₹2 lakh on interest and the entire principal amount as per the taxation laws. Check out the table below to understand the calculation.

Loan & Income Tax ParticularsAmount (In ₹)
Gross Annual Income8,50,000
Standard Deduction50000
Resultant Sum (Gross Annual Income - Standard Deduction)8,00,000
Tax Deduction on Principal78650
Tax Deduction on Interest2,00,000
Total Tax Deduction2,78,650
Taxable Income (Resultant Sum - Total Tax Deduction)5,21,350
Upto 2.5 LakhNo Tax
Above 2.5 Lakh - 5 Lakh (5%)5% of (5,00,000-2,50,000) = 12,500
Above 5 Lakh - 5,21,35020% of (5,21,350-5,00,000) = 4,270
Education Cess (4% of the total tax payable)4% of (12,500+4,270) = 670.80
Income Tax + Education Cess17,440.80

In the absence of tax benefits, you will end up paying ₹75,400 in a year. The table below will tell you how.

You can save ₹57,959.20 (75,400-17,440.80) when you claim tax benefits on a home loan.

How to Claim Tax Benefits?

To claim the benefits, you should mention the repayment details of your home loan in an investment declaration form. You can get the form from your concerned employer. The details, if found true, can help you get tax exemptions.

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  • Home Loan Interest Rates November 2019
    Axis Bank8.90% - 9.15%
    Bank of Baroda8.40% - 9.40%
    Citibank9.00% - 9.85%
    DHFL9.05% - 9.95%
    HDFC8.25% - 9.30%
    ICICI Bank9.20% - 9.65%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank8.90% - 8.75%
    LIC Housing8.35% - 8.95%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance9.25% - 12.00%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI8.15% - 8.80%
    Tata Capital9.20% - 9.35%