Tax isnt on the house

Written by Adhil Shetty | Updated: Mar 21 2014, 09:10am hrs
As we approach the end of the financial year, a lot of people start worrying about their tax planning, looking frantically for ways to save taxes. A lot of people plan taxes over the year, but the number of people waking up in the last quarter is also substantially high.

Home loans have played a very significant role in reducing the tax liabilities of a number of taxpayers. Here, let us look at some of the finer points that everyone needs to know before taking a home loan for tax-saving purpose.

Tax benefits from home loans can be divided into two sub-sections. One, the repayment of the principal loan amount and, two, the repayment of the interest on the loan. Tax benefits on home loans are governed by different sections of the income tax act. The amount paid towards principal repayment is allowed for tax deduction under section 80c of the income tax act while the amount paid as interest comes under Section 24 of the Income Tax Act, 1961.

Tax benefit on principal repayment (Section 80C)

The total amount paid towards repayment of the principal loan amount is allowed for tax deduction under Section 80c. The maximum deduction allowed under the act is R1 lakh, which includes funds invested in PPF accounts, tax-saving FDs, equity-linked savings scheme (ELSS) and other financial instruments, along with repayment of the principal amount.

Tax benefit on interest repayment (Section 24)

The total amount paid towards interest on the principal loan amount is allowed for tax deduction under Section 24 of the I-T Act. The maximum limit for tax deduction under the section is limited to R1, 50,000. If the property is self-occupied, the deduction is allowed for only one such property. Another important point is that if the property is not constructed or acquired within three years of taking the home loan the interest benefit comes down to R30,000 per month.

Lets say the principal repayment amount on a home loan is R1,10,000 and the interest payable for the year is R1,60,000. Hence, the total deduction allowed as per Section 80C and Section 24 would be the total of R1,50,000 towards interest payable and R1,00,000 for principal repayment.

Taking a home loan to save taxes: Things to remember

Loan is often described by financial experts as a dreaded four-letter word everyone wants to avoid. There are prudent ways to use loans, especially home loans, so that they can bring in some benefits. While a lot of people take a home loan because they actually need it to buy a house, a substantial number of people use home loans as a tax-saving tool even though they have the financial wherewithal to buy a house. Irrespective of which side of the coin you look at, home loans offer a great mechanism for tax savings. So, before you go out and take that home loan, there are certain things you must keep in mind. These happen to be things your advisor may not tell you.

Joint ownership with spouse. You can include your spouse as a borrower for tax benefits on home loans. Both joint applicants in a home loan are eligible for tax benefits as per their share in the loan. Both partners can claim benefits up to the maximum limit.

Tax benefit on HRA. A lot of people work away from their homes and end up staying in a rented apartment. If you have bought a property with a home loan in one city, and you are staying in a rented accommodation in another, you are entitled to both home loan and house rent allowance (HRA) benefits when it comes to saving taxes.

The writer is CEO,