Maximising tax benefits on your home

Use your calculator or go to a tax advisor and find out the deductions available on repayment of your loan. By R.P. Deshpande

 

The Union government has been encouraging the construction sector in a big way, as the sector is considered as an ‘engine of growth’. It catalyses more than 265 industries and on the social front, generates the highest employment opportunities and helps increase housing stock in the country.

One of the major benefits directly available to the common man is the substantial savings in income tax payable on account of deductions available on repayment of home loan.

Let us know the Income Tax deductions available for the present year (financial year: 2016-17: assessment year: 2017-18).

Under Section 80C of IT Act 1961, home loan borrowers are eligible for deduction up to Rs. 1,50,000 pa on the principal amount repaid during the year (along with specified saving instruments, like premium paid on Life Insurance & contribution to PF etc.)

Under Section 24(b) of IT Act 1961, home loan borrowers get deduction up to Rs. 2,00,000 pa on the interest paid on the home loan for self-occupied property.

If property is let-out, the entire interest paid on home loan is eligible for deduction, after appropriating rental income.

Additional deduction

Under Section 80EE, additional deduction of Rs. 50,000 is allowed for first-time home buyers for loans up to Rs. 35 lakh. Other condition being the value of property is less than Rs. 50 lakh and loan is sanctioned between April 1, 2016 and March 31, 2017. The benefits of deduction will continue till repayment of loan.

3. Under Section 24(b), the total accumulated interest paid during the pre-construction period (Pre-EMI Interest) can be claimed as deduction in five successive financial years in equal instalments, after house construction is complete. However, deduction is limited to Rs. 2,00,000 pa, on self-occupied properties.

4. Under Section 80C, along with other specified savings and home loan repaid, the amount spent for processing fee, stamp paper and registration cost on registering the house property up to Rs. 150,000 is be deductible from taxable income.

The income tax rates for the current financial year for individuals below 60 years of age are mentioned in Table A.

Let us analyse two cases to see how one can maximise the benefits available:

Illustration 1:

On a taxable income of Rs. 960,000 p.a., Anand Rao, 30 years old, is liable to pay income tax of Rs. 117,000 + Rs. 3,510 (education cess) = 120,510.

Mr. Anand Rao has purchased a property costing Rs. 50 lakh during this year by taking a home loan amounting to Rs. 35 lakh @ 9.4% interest, with repayment term of 12 years. His EMI is Rs. 40,624. In the first year, interest paid is Rs. 321,990 and principal repaid is Rs.165,498. (Table B).

Thus Mr. Rao saves more than two EMIs per year, on account of savings as above.

Effective interest

If tax savings are appropriated to the interest paid towards home loan, the effective interest reduces to 6.85%, as per following.

Interest paid @9.4% on Rs. 3,500,000 : Rs. 321,990 (on monthly reducing balance)

Less Income Tax saved as above : Rs. 82,400

Effective interest paid : Rs. 239,590

Hence effective interest on loan amount: 239,590/3,500,000 = 6.85%

Illustration 2:

Shruthi, 28 years old with a taxable income of Rs. 475,000 p.a. and her husband Krishnamurthy, 31 years old, with a taxable income of Rs. 490,000 p.a., have jointly purchased a 2-BHK apartment costing Rs. 48 lakh, by taking a home loan of Rs. 35 lakh @ 9.4% interest, for 10 years term, with an EMI of Rs. 45,098. In the first year, interest paid will be Rs. 319,616 and principal repaid will be Rs. 221,560.

Tax implications

Let us analyse the tax implications separately for Mrs. Shruthi and Mr. Krishnamurthy.

On taxable income of Rs. 475,000, Mrs. Shruthi has to pay income tax of Rs. 18,025 including special rebate of Rs. 5,000, since her income is less than Rs. 500,000.

On taxable income of Rs. 490,000, Mr. Krishnamurthy has to pay income tax of Rs. 19,570 including special rebate of Rs. 5,000, since his income is less than Rs. 500,000. Since interest paid on home loan is Rs. 319,616, both Mrs. Shruthi and Mr. Krishnamurthy can claim 50% deduction each (Rs. 159,808) under Sec 24 of IT Act, and both can separately claim deduction of 110,780 (50% of principal loan amount repaid) under Sec. 80C of IT Act.

After claiming deductions as above, Mrs. Shruthi’s taxable income gets reduced to Rs. 204,412, and that of Mr. Krishnamurthy to Rs. 219,412, thus for both, tax liability becomes nil. They stand to save tax of Rs. 37,595.

Considering the ambitious plans of the Union government such as ‘Smart Cities’, and ‘Housing for all by 2022’ to boost to the real estate sector, it is hoped that there will be more income tax benefits for home loan borrowers in the years to come.

(The author is founder Director of Institute of Home Finance, Bengaluru, and can be contacted on Ph: 93412 13530 or at deshpanderp2007@gmail.com)