From Deccan Chronicle
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.
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!
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.
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.
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.
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:
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.
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).