There are lock-in periods that need to be observed in case you have claimed deduction against repayment of home loan
Ashwini Kumar Sharma | Last Published: Mon, Jan 08 2018. 08 20 AM IST | LiveMint.com
There are various income tax sections under which you can claim deductions for expenses and investment incurred by you during the relevant financial years. Such deductions help you to bring down the taxable income for the respective fiscal and consequently reduce your tax liability.
However, in many cases, a lock-in period is specified—under the section of the Act as well as the instrument against which you may have claimed a deduction. If you fail to observe the lock-in period, the deductions that you availed can be revoked.
Let’s read more about the lock-in periods that need to be observed in case you have claimed deduction against repayment of home loan principal amount.
The deduction on home loan
If you take home loan for purchase or construction of a house, the capital repayment and interest paid on the home loan qualify for deduction under separate income tax sections. While principal repayment qualifies for deduction under section 80C of the Income-tax Act, 1961 and has an overall limit of Rs1.5 lakh a year, the interest payment on home loan qualifies for deduction under section 24(b) of the Act, with an overall limit of Rs2 lakh a year. There is an additional deduction of Rs50,000 for interest payment on home loans under section 80EE for the first-time homebuyers.
While there is no lock-in period for deduction claimed against interest payment on home loan under section 24(b) or 80EE, the section 80C(5) (relating to repayment of principal) of the Act stipulates that if you sell your house within 5 years from purchase or date of possession, the deduction claimed on principal repayment during previous years gets revoked. In this case, all the deductions claimed for home loan principal repayment under section 80C during the previous years too have to be clubbed together and added to income of the year of sale, and be taxed accordingly.
Let us assume you had bought a house in May 2014 with a home loan, and had claimed about Rs4 lakh under section 80C over the last 3 financial years—FY2014-15 to FY2016-17. If you sell the house now, the entire Rs4 lakh claimed earlier as deduction under section 80C will get added to your income for FY2017-18 and you will have to pay tax on the total income as per the income tax slab applicable to you.
Apart from home loan principal amount, the stamp duty and registration fee paid for registration of property also qualify for deduction under section 80C in the year of purchase. If you had claimed stamp duty and registration fee as deduction, you need to observe the 5-year lock-in in these cases too.
If the property is sold before 5 years, the deductions claimed against stamp duty and registration fee will get revoked and get added to the income of the year of sale and tax accordingly.
So, before you decide to sell your house, keep the lock-in criteria in mind. Else, your tax liability may increase considerably in the year of sale.
Suresh KP | Feb 15, 2017, 05.48 PM | Source: Moneycontrol.com
Investing in tax saving ELSS mutual funds would help you to save tax u/s 80C as well as giving superior returns.
Many of the tax payers are looking for various options to save income tax u/s 80C. While there are several options to save tax, one of the attractive ways is to invest in tax saving funds, technically known as ELSS.
What are tax saving funds?
Equity Linked Saving Scheme (ELSS) or tax saving funds provide tax exemption u/s 80C along with higher returns compared to any other tax saving option. Investments in ELSS upto Rs 1.5 lakh bring in tax deduction under section 80C.
Compared to other tax saving schemes like Tax saving FD, PPF, NSC etc, ELSS offers higher returns. However, a point to note is that these returns are not guaranteed. These ELSS have low lock in period of 3 years. Other instruments have lockin period ranging between 5 years to 15 years.
After taking into account these benefits lets look at five ELSS that can be considered as good investment options to save tax and create wealth.
1) Reliance Tax Saver Fund
This MF scheme objective is to generate long term capital appreciation from a list of stock portfolio and invests predominantly in equity and equity related instruments in India. This scheme has provided 20.3% annualized returns in last 5 years. Even in last 3 years, this scheme provided 30% annualized returns. This scheme is ranked by Crisil as Rank-3 (1 is vergy good performer and 5 is weak performer)
2) Axis Long Term Equity Fund
This tax saving scheme aims to generate regular long term capital growth from a diversified portfolio of equity and equity related securities in India. This mutual fund scheme is the top performer in the ELSS funds over five years time frame. This scheme has provided 21% annualized returns in last 5 years. Even in last 3 years, this scheme provided high returns of 24.9% annualized returns. This scheme is ranked by Crisil as Rank-4 (1 is vergy good performer and 5 is weak performer)
3) DSP BR Tax Saver Fund
The mutual fund scheme aims to generate medium to long-term capital appreciation from a diversified stock portfolio of equity and equity related securities along with tax savings. This mutual fund scheme is the top performer in the ELSS funds.This scheme has provided 20.4% annualized returns in last 5 years. Even in last 3 years, this scheme provided good returns of 26.6% annualized returns. This scheme is ranked by Crisil as Rank-1 (1 is vergy good performer and 5 is weak performer)
4) Birla SL Tax Relief 96 Fund
This mutual fund scheme aims for long term capital appreciation by investing upto 80% in equity and balance in debt related instruments. This scheme has provided 19.1% annualized returns in last 5 years. Even in last 3 years, this scheme provided good returns of 25.6% annualized returns. This scheme is ranked by Crisil as Rank-2 (1 is vergy good performer and 5 is weak performer).
5) Franklin India Tax Shield Fund
The MF scheme aims medium to long term growth of capital along with income tax rebate. This scheme has provided 17.5% annualized returns in last 5 years. Even in last 3 years, this scheme provided good returns of 24.3% annualized returns. This scheme is ranked by Crisil as Rank-3 (1 is vergy good performer and 5 is weak performer).
Smart investors would invest in a good ELSS mutual funds which helps them to save tax and also provides high returns compared to any other tax saving options.
The author of this article is founder of Myinvestmentideas.com.
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
Bindisha Sarang | Apr 4, 2016 10:49 IST | First Post
Public Provident Fund (PPF) gives you tax free returns of 8.1%. But, did you know the returns can be more from your PPF account if invested at the right time? Read on.
PPF account allows you to invest Rs 1.5 lakh ever year. And, thanks to Sec 80 C, the returns are tax free. While the interest on the PPF account balance is compounded annually, the interest calculation, however, is done every month. The interest is calculated on the lowest balance in your account between 5th and the last day of the month.
What does this mean? Simply put, if you deposit the amount after 5th, you miss earning interest for that particular month.
So, the smart thing to do is to make the most of your PPF account by putting money on or before the 5th of every month.
Even better, in case you have idle money at your disposal, a single deposit of Rs 1.5 lakh can be put into your PPF account before 5 April, right at the start of the new financial year, to earn interest for the whole year.
But if you don’t have that kind of lump sum money, make sure you make a a monthly investment before the 5th of every month. Of course, the minimum you can invest in PPF is Rs 500 a month.
Source : http://goo.gl/R8Gmoy
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
NDTV Profit Team | Last Updated: February 12, 2016 12:42 (IST)
The purchase of a house, by taking out a home loan, is considered good by personal finance experts, who generally scoff at long-term liabilities.
A house, unlike other personal goods such as cars, is considered to be an asset. There’s tax benefit too. Home buyers can claim an exemption of up to Rs. 1.50 lakh on principal payments for home loan under Section 80C of the Income Tax Act.
Buyers can avail Rs. 2 lakh deduction paid towards interest component of home loan per year.
The above-mentioned benefits apply for self-occupied properties and not for under construction houses. Further, in case of a delayed possession, the tax benefits get reduced substantially. Many a times, tax payers – unaware of this provision – claim full tax benefits on their home loan and get notices from the tax department.
According to Section 24B of Income Tax Act, a person can claim a tax deduction of up to Rs. 2 lakh on the interest paid on a self-occupied house if the possession of the property is done within three years of taking the loan.
In case the possession is given after three years, then the amount of deduction is reduced to Rs. 30,000 per year.
This means in case of delayed possession (when houses are delivered three years after a home loan has been taken), buyers can claim only Rs. 30,000 (15 per cent of the current allowed deduction of Rs. 2 lakh) as exemption.
Those who unknowingly claim exemption can get into serious trouble and may have to pay huge penalties, experts say.
“If the home buyer in such cases still claims interest of Rs. 2 lakh per annum, the tax office could disallow the deduction of Rs. 1.7 lakh per annum which could result in additional tax and interest payable by the home buyer to the tax office. At their discretion the tax office can also levy penalty for claiming excessive deduction,” says Parizad Sirwalla, National Head-Global Mobility Services-Tax, KPMG.
The penalty in this case may range between 100 per cent and 300 per cent of the extra tax deductions claimed, says Amit Maheshwari, managing partner of Ashok Maheshwary & Associates.
Tax experts say that home buyers are getting tax notices for claiming over Rs. 30,000 deduction, despite delayed possession. “As people are getting the possession of the house which they booked five to seven years back now, tax department are scrutinising the returns and people are getting notices from the tax department for the same,” says Sudhir Kaushik, chief financial officer, Taxspanner.com.
Tax experts believe that Finance Minister Arun Jaitley in the budget should relook at the tax benefits offered on home loans. “It may be worthwhile to consider an amendment in the provision not limiting such deduction to Rs. 30,000 per annum in cases where the delay in completion of construction is caused on account of reasons beyond the control of the home buyer,” says Parizad of KPMG.
Tapati Ghosh, partner at Deloitte Haskins & Sells, said: “One of the measures that could be considered is the extension of time limit to 5 years at least for the under-construction properties.”
Source : http://goo.gl/AGvChJ
Ashwini Kumar Sharma | Last Modified: Thu, Jan 28 2016. 03 09 AM IST | Live MInt
Borrowing money to buy a house not only gets you an asset but also helps you save on taxes along the way
Given the high property prices in metros, on an average an apartment having two bedrooms, hall, and kitchen of 1,200 sq. ft in an ordinary location will cost at least Rs.60 lakh or Rs.5,000 per sq. ft and or more. So, to buy such a house, most people take the help of a home loan, which usually forms 70-80% of the apartment’s value. This is probably the biggest loan that a person will ever take; thankfully, the related tax breaks are also significant. For example, a person servicing a home loan can claim deduction against principal repayment as well as against payment of interest. For investors, this enhances their profit margins. “Taking a home loan for investing in a residential property can significantly affect the buying decision,” said Amit Maheshwari, managing partner, Ashok Maheshwary and Associates, a chartered accountancy firm. Take a closer look at your home loan’s tax benefits.
Deduction on repayment
The equated monthly instalment (EMI) that you pay has two components, principal and interest. Both qualify for tax deduction under two separate sections of the Income-tax Act, 1961. Principal repayment can be claimed as deduction under section 80C of the Act, whereas interest under section 24(b).
Various other investments and expenses qualify for deduction under section 80C, which has an upper limit of Rs.1.5 lakh. However, section 24(b) provides exclusive deduction against interest payment on home loan. In this, you can claim deduction for interest payment on borrowed capital for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. If home loan is taken for purchase or construction of a house, the exemption limit if the house is self-occupied is capped up to Rs.2 lakh, but there is no cap if the house is let out.
Take a joint home loan
Often borrowers take a joint home loan to enhance the loan eligibility. This is usually done along with spouse, parents, or in certain cases, with siblings. The tax benefit can be claimed by all the borrowers individually, provided they are co-owners of that property too. “When a property is purchased jointly, and the loan is co-borrowed, the deduction of Rs.2 lakh and deduction under section 80C (maximum Rs.1.5 lakh) is allowed to both the co-owners cum co-borrowers in the ratio of their ownership,” said Archit Gupta, chief executive officer and co-founder, http://www.cleartax.in. If you buy a property along with your spouse and both of you share equal rights over the property, you both are eligible to claim deduction equally. So, if the total payment in a year towards home loan is Rs.6 lakh, with Rs.1 lakh as principal and Rs.5 lakh as interest, both the borrowers can claim Rs.50,000 each under section 80C (against principal) and Rs.2 lakh each under section 24(b), if it’s a self-occupied house, or Rs.2.5 lakh each if it’s a let-out property.
Things to remember
You can only claim tax benefit on repayment of home loans once the property is complete. If you buy an under-construction property, you are not allowed to claim the deduction till the time the property is fully completed and you get possession.
“(But) pre-construction interest can be claimed in five equal instalments starting from the year in which construction is completed (within the overall limit mentioned above),” said Gupta. For instance, if you have paid Rs.5 lakh as interest on home loan during the construction period, you can claim Rs.1 lakh (one-fifth of Rs.5 lakh) each year, after you get possession of the house.
In case of a joint loan, typically lenders insist on borrowers opening a joint bank account to pay EMIs. Make sure each co-borrower contributes according to her respective share in the joint account. It helps to provide proof of contribution or payment to the taxman in case of scrutiny.
A home loan is a big liability, but it also offers substantial tax breaks. Understand these carefully so that you can make the best of the situation.