By Narendra Nathan, ET Bureau| 9 May, 2016, 12.29PM IST | Economic Times
If you have an outstanding home loan, and happen to have just received an annual bonus or any other lump sum payment, should you use it to prepay your loan? Or, should you invest it to meet some other goals? Assess the following conditions to arrive at the right decision.
The first variable to be considered is psyche: some people may not be comfortable with a large housing loan and to reduce their stress they may want to get rid of the loan burden at the earliest. For them, settling the question of how to use their bonus is simple: just pay off the loan. Gaurav Mashruwala, Sebi-registered investment adviser, categorically states: “You should pay off the home loan at the earliest. Several unfortunate happenings— job loss, death of the earning member, serious illness, etc—can cause trouble during the 10-15 year loan period. Treat it as a mind game and not a numbers game.”
Tax benefit is the next variable. If a home loan does not seem like the sword of Damocles hanging over your head, it makes sense to continue with the regular EMI schedule. This is because of the tax benefits that a home loan offers. The principal component of the EMI is treated as investment under Section 80C. The interest component is also deducted from your taxable income under Section 24. The annual deduction in respect of the interest component of a housing loan, for a self occupied house, is limited to Rs 2 lakh per annum.
You won’t be able to claim deduction on interest paid above Rs 2 lakh. So, if your annual interest outgo is higher than Rs 2 lakh, it makes sense to prepay the loan, and save on future interest payment. For example, the annual interest on a Rs 70 lakh outstanding loan, at 9.5%, comes out to be Rs 6.65 lakh. After taking into account the Rs 2 lakh deduction under Section 24C, the interest component will fall to Rs 4.65 lakh, and bring down the effective cost of interest from 9.5% to 8.64%, even for the people in the 30% tax bracket.
You can, however, optimise the tax benefits if the loan has been taken jointly, say, with your spouse. “If joint holders share the EMIs, both can claim Rs 2 lakh each in interest deduction,” says Harsh Roongta, Sebi-registered investment adviser. In case of joint holders share the EMIs, both can claim Rs 2 lakh each in interest deduction,” says Harsh Roongta, Sebi-registered investment adviser. In case of joint holders, there is no need to prepay if the outstanding amount is less than Rs 40 lakh.
There is no cap on deduction in lieu of interest paid on home loan, if the property is not self-occupied. “Since there is no cap for interest on loan against second or rented out homes, there is no need to prepay it,” says Naveen Kukreja, CEO and Co-founder, Paisa Bazaar. Bear in mind, by prepaying your loan, you may also forego future tax benefits. For instance, if by prepayment, you bring down your outstanding loan amount to Rs 20 lakh, your annual interest outgo for subsequent years may fall below Rs 2 lakh. Thus, you won’t be able to avail of the entire tax-deductible limit and, in such a scenario, prepayment may not be a good strategy. Also, building an emergency fund, if you don’t have one, should take a priority over prepaying the housing loan: “Make sure that you have a contingency fund in place before opt for prepaying your home loan,” says Roongta.
The third key variable is returns from investment of the lump sum at hand. As a thumb rule, you should go for investment, instead of prepayment, only when the post-tax return from the investment is likely to be higher than the effective cost of the housing loan. For investors in the 30% tax bracket, and whose outstanding home loan balance is less than Rs 20 lakh, the effective cost of loan is only 6.65%. Since there are several risk-free, tax-free debt options such as PPF, Sukanya Samruddhi Yojana and listed tax-free bonds, which offer higher annualised return than this, it makes sense to invest in them.
All the debt products mentioned above are long-duration products. If your risk-taking ability is higher and time horizon is longer, you can consider investing in equities, which can generate better returns “It’s sensible for long-term investors (five year-plus holding period) to go for equities, provided they are savvy and understand the risks involved there,” says Kukreja.
There are some home loan products that provide an overdraft facility of sorts and help you maintain liquidity. All you have to do is to park the surplus money in these products and not bother with whether it’s a prepayment or not. It’s like prepayment with the option of taking out that money, in case you need it in future for personal use or for investment purpose. The strategy of maintaining the housing loan interest close to Rs 2 lakh per annum can also be managed by these special loan products. And even if you are going to invest, the SIPs can go from this account.
“I park my bonus and do SIPs in equity from the loan account,” says Kukreja. Most banks charge more for these special loan products. “Though the stack rate differential is more, you can bring it down by bargaining with the banks,” he adds.
Source : http://goo.gl/3ce3eL
A homebuyer will be able to avail tax deduction of Rs.2 lakh on interest paid even if the house is ready in five years from the end of the finance year in which the home loan was taken
Ashwini Kumar Sharma | Last Modified: Thu, Mar 03 2016. 07 07 PM IST | Live MInt
Budget 2016-17 did not have much to offer to the individual taxpayer, as there was no change in slab rates nor was there an increase in deduction limits under various sections. However, it offered some relief to those who had recently bought or are planning to buy an under-construction apartment. The change, which is related to deduction against repayment of home loan, is small but holds big benefits for many homebuyers. In a recent story (http://bit.ly/1Qjwg84), we had stated how real estate project delays increase the effective cost of home buying by more than 25% for a homebuyer, and that the loss of tax benefit due to project delay is the biggest culprit. The new tax benefit offered in the Budget helps here. Here’s how.
Existing tax rules
Tax benefit on repayment of home loan helps homebuyers bring down the tax outgo substantially. According to the Income-tax Act, 1961, a borrower can claim deduction under section 80C against principal repayment, which has an overall limit of Rs.1.5 lakh, and up to Rs.2 lakh for payment of interest under section 24(b) for a self-acquired house. If the house is leased out, then the entire interest paid on home loan can be claimed as deduction. These tax breaks, however, are available based on the ownership of property.
Until the construction of the property is complete and you have the registration and ownership documents, you may not be able to claim these deductions. So, no possession means no tax benefit on the huge home loan. And that’s not all.
The bigger problem is when construction of a property gets delayed.
As per the prevailing tax rules, if the property does not get completed within three years, the maximum deduction allowed to a taxpayer for interest on home loan reduces to Rs.30,000 per annum. One can only claim deduction up to Rs.2 lakh if the property she buys gets completed within three years from the year in which the loan was taken. However, given the current condition of the real estate market, on an average, residential projects are getting delayed by 24-30 months. So, for those who take a loan to buy an under-construction property, delay in delivery leads to a substantial hit on tax savings.
In his Budget proposal for 2016-17, the finance minister proposed to increase the time limit for completion of projects from three years to five years. So, once implemented, a homebuyer will be able to avail tax deduction of Rs.2 lakh on interest paid even if the house is ready in five years from the end of the finance year in which the home loan was taken.
If you take a home loan in August 2016, and you get the house in March 2022 or before, you get the full Rs.2 lakh tax break. However, if you get the house after March 2022, you will not get the full benefit.
Source : http://goo.gl/Os5wAL
Brijesh Parnami | 07 Apr, 2015 17:56 IST | Business World
Home loan can be burdensome as you think the interest outgo squeezes your income. But on the contrary, it actually helps you save more money by providing a breather from taxes, writes Brijesh Parnami, Chief Executive Officer, Destimoney Advisors
Tax outgo skims the hard-earned money you make out of your jobs and businesses. However, to be a responsible citizen, there is no other way out. One has to submit taxes without a fail, to allow the government to take up tasks meant for creating better services and infrastructure for its people.
To ease the tax burden, the government from time to time provides breather in the form of tax rebates. One of the effective tools for saving tax is a home loan. By purchasing a house, you not only become eligible for tax deductions but also a proud owner of a home.
The sole aim of the government to provide lucrative tax breaks on home loan is just to push people to purchase properties. By doing so, it keeps the housing segment booming, the ripple effect of which is seen on other sectors as well.
Home loans are a great way to save tax and enjoy long-term relief. Income Tax Act, 1961 states that loans can be used as tax-saving instruments too. After procuring a home loan for purchasing a property, a person can claim tax deductions on the principal amount as well as on the interest that he would be paying towards servicing the loan.
Tax benefits on home loans are available under the Income Tax Act Sections 24, 80C and 80EE. Only individuals and HUFs (Hindu Undivided Families) are eligible for the benefits. These tax benefits are available only on home Loans and not on Non-Home Loans such as loan against property (LAP) etc.
Tax Benefit On Home Loans
Purchasing a home does not come easy. There is a fat chunk of money that that has to be paid as down payment and for the rest a home loan can be taken, for which one has to pay higher interest rates. But this home loan is your saviour from the taxes that you have to pay year after year. As home loans are for long term, one can enjoy the tax benefits on it during the designated period for which the loan has been sanctioned.
Tax benefits are available on two components of a home loan — Principal amount and the Interest. While the benefit on principal repayment can be availed under Section 80C, the same can be claimed on the interest repayment under Section 24.
The UPA government had introduced Section 80EE in the budget 2013-14 offering additional tax benefits on interest repayment, with certain riders. First time buyers were who took home loan in the financial year 2013-14 became eligible for availing additional tax benefit on Rs 1 lakh for interest payment over and above the tax deduction available under Section 24. For unutilized interest, the deduction was available for financial year 2014-15 as well. This additional tax saving means provided people more room to save extra bucks. But the government did not extend it in the following years and this year too there was no mention of Section 80EE.
For the financial year 2015-16, the benefits are available on Section 80C and Section 24 only.
·Section 80C — On repayment of Principal Amount & Stamp Duty/Registration Charges
On Repayment of Principal Amount
The amount that is repaid by the borrower towards the principal component of the home loan is allowed as tax deduction under Section 80C of the Income Tax Act. One can avail maximum tax deduction to the tune of Rs 1.5 lakhs under this section. This limit of Rs 1.5 lakhs is towards the total amount paid collectively for PPF, Tax Saving FDs, Equity oriented mutual funds, National Savings Certificates, among others.
The section does not allow the benefit during the years when the property is under construction mode. One can avail the tax deduction only after completion certificate has been given. However, important point to note is that a taxpayer can aggregate the interest that has been paid when the construction was on and can claim the deduction in five equal instalments in the five consecutive financial years, beginning the year during which the construction completes.
However, if the owner sells the property on which he has sought the tax benefit within the five years from the date of obtaining the possession then no tax deduction is allowed. If the assessee has availed tax benefits during this period, then it is treated as income and makes it liable for tax payment.
Also, the deduction is available on payment basis, notwithstanding the year in which the payment was made.
On Stamp Duty & Registration Charges
Section 80C also provides for tax deduction on the stamp duty and registration charges that are paid while purchasing the property. One can claim the deduction as prescribed in section 80C i.e. a maximum of Rs 1.5 lakhs and it is again the total amount paid collectively for PPF, Tax Saving FDs, Equity oriented mutual funds, National Savings Certificates, among others. The deduction can be claimed in the year in which these payments are made.
Section 24 — On payment of interest
In case of purchase of property, this benefit can be availed only when the construction of property is complete and the possession certificate has been provided. Other than purchase of property, the tax deduction is allowed on loans taken for construction, repair, renewal and reconstruction of a residential house property. The income on house property is adjusted with amount of Interest paid on home loan.
Rs 2 lakh is the maximum deduction limit one can enjoy under this section in case of self-occupied property. Besides, if the property is not completed within three years from the date of loan sanction, the interest benefit comes down to Rs 30,000 from Rs 2 lakh.
In case the property is not self occupied, there is no limit and one can claim the whole interest for tax deduction sake. However, there is a fine print here: If the owner does not self occupy the property and resides at any other place due to responsibilities related to job or business, then the deduction one can avail is only Rs 2 lakh.
Unlike the deduction available under section 80C on payment basis, the deduction under this section is available on accrual basis. So the deduction has to be claimed on yearly basis even if even if no payment has been made during the year.
*Borrowers are advised to consult Tax Consultant/Chartered Accountant in all the cases.
Source : http://goo.gl/63Nzfq
Ashwini Kumar Sharma | First Published: Wed, Jan 14 2015. 07 01 PM IST | Live Mint
You can claim tax benefit for both, but only if you fulfil the conditions
If you are living on rent and also servicing a home loan, you can take advantage of claiming tax exemption for both house rent allowance (HRA) and repayment of home loan. The equated monthly installment (EMI) against your home loan is a combination of principal repayment and interest on the outstanding loan. All three—HRA, principal repayment and interest payment—can be claimed as exemption under separate sections of the Income-tax Act. However, there are certain conditions that you need to fulfill before you can do so. Let’s have a look at these.
Exemptions and deductions
Income tax rules allow tax payers to claim exemption against some investments and expenses that the assessee has incurred out of her gross income. While exemption for HRA can be claimed under section 10(13A) of the Income-tax Act, principal repayment of home loan and interest on it can be claimed under sections 80C and 24b, respectively.
HRA can be claimed as lowest of actual HRA received from the employer or 50% of the salary for employees living in metro cities (40% for those residing in cities other than metro) or actual rent paid minus 10% of salary (basic + dearness allowance + turnover based commission).
Principal repayment exemption can be claimed up to the threshold limit under section 80C, which is Rs.1.5 lakh, or the actual principal repaid, whichever is less.
Similarly, interest repayment can be claimed up to the threshold limit under section 24b, which is Rs. 2 lakh (if the house is self-occupied) or actual interest paid on home loan, whichever is lesser. In case the house you own is rented out, you can claim the entire interest you pay on the home loan as deduction.
What are the requisites?
You can claim HRA exemption if you are living on rent, whereas you claim deduction for repayment of home loan. You can claim tax benefit for both, but only if you fulfil the conditions.
Let’s say you have bought a house by taking a home loan and you also live in it. In this case, you will not be able to claim HRA, but will be able to claim tax benefits on both the principal and interest.
If you have bought a house with the help of a home loan and live in another house on rent, you can claim tax benefit for both. But if the house you bought and the house you live in are in the same city, you should have a genuine reason for not living in the house that you own. The reasons could be that the house you own is too far from your workplace, or the commute is very difficult.
You may need to provide these explanations to your employer, or the income tax authority in case there is a scrutiny of the details that you have provided.
Source : http://goo.gl/KGBqc3
By Parizad Sirwalla | Dec 12, 2014, 01.39PM IST | Economic Times
With the ever-spiralling property prices, obtaining a loan from a bank is almost inevitable. In double-income urban families it is now common to share the financial burden as well and apply for joint home loans. Taking a joint housing loan along with your spouse (assuming the other is an earning member) can increase your repayment capacity and also enhances the loan eligibility amount.
A joint housing loan can also bring tax benefits and this has been a big draw with many working couples. The Income Tax Act, 1961 (Act) allows both principal repayment (under Section 80C of the Act) and interest payments (under Section 24(b) of the Act) as deductions from your income. Thus, for the principal payment an individual can claim up to Rs 1.5 lakh per annum and on interest payment (on construction / purchase of self -occupied house property) up to Rs 2 lakh per annum.
So, you can save up to Rs 3.5 lakh per annum. This limit doubles in the case of a joint-loan.
Here’s is a comparison of the tax benefits between a single housing loan and a joint one:
Assumptions: Principal repayment during a financial year (FY) – Rs 5 lakh per annum and interest payment (assuming on self -occupied house property) during a FY – Rs 7 lakh per annum.
If this property is rented, then the rental income will also be taxable for the spouses in proportion of their share. Also, the entire interest of Rs 7 lakh can be claimed by the spouses in the proportion of their share of payment. Here’s an example:
Assuming that the rental income earned during a financial year is Rs 20 lakh and the principal repayment during a financial year is Rs 5 lakh while the interest paid (assuming on self -occupied house property) during a year is Rs 7 lakh. Here’s how your taxable income will be calculated.
Also, from a wealth tax perspective, share of each spouse on the house can be claimed by them as exempt from wealth tax; as one house is exempt from wealth tax.
Source : http://goo.gl/3ViMo3