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Housing loans are one of the most-commonly acquired forms of credit in India, allowing millions of people to buy their dream properties. Are you planning to opt for a home loan in the near future?
Apart from considering the obvious factors, such as interest rate and tenure, you should also keep an eye on tax deductions from your home loan repayments.
How much can you save on yearly tax liabilities?
Well, the short answer is that it depends. It depends on several factors, such as your age, taxable income, principal repayment and interest amount for the assessment year. Additional factors can also come into play.
For instance, individuals assessing their taxes under the older regime are qualified for different tax rebates for home loan repayment in comparison to new tax regime assessees.
Are you still confused about your home loan tax benefits? This guide is here to help!
The Income Tax Act, 1961 offers various provisions for a tax rebate on home loans. The following are the three major areas where such a borrower can claim exemptions:
Keep in mind that tax deductions are calculated only on your taxable income and not your net earnings.
For instance, under the older regime of income taxes, individuals earning more than Rs.2.5 lakh a year are liable to bear taxes.
Now consider that your yearly income is Rs.4 lakh. In that case, home loan benefits will be applicable on your taxable income of Rs.1.5 lakh (Rs.4 lakh-Rs.2.5 lakh) only and not your entire yearly earnings.
The above-listed provisions offer a glimpse into the significant savings that one can claim on their income tax liabilities.
Nevertheless, you should also understand the various terms and conditions, along with the applicable Sections, under which such savings are applicable:
Taxpayers can claim this benefit only once, with maximum deduction limited to Rs.1.5 lakh in a particular financial year.
However, besides the principal repayment sum, this particular benefit calculation also considers associated costs of buying the concerned property, such as stamp duty and registration charges.
You can claim maximum deductions of up to Rs.2 lakh on your income tax liabilities, based on home loan interest payments for self occupied house properties. There is no such ceiling limit for deduction on a rented out house property.
However, to claim this, the property in question must complete its construction within 5 years. Failure to do so will reduce savings potential to just Rs.30000 for taxpayers.
This section only applies to you if you have no other property to your name. Other conditions that must be met to claim this additional benefit are:
Apart from these provisions, you can also seek tax deductions under Section 80EEA in case of affordable housing.
Under this, taxpayers can claim an additional Rs.1.5 lakh tax savings on home loan interest payment, besides the interest-related rebates offered under Section 24. You can keep claiming this benefit until full repayment of home loan.
Additional conditions to consider here is that most of these tax exemptions are only applicable after the construction of a property is complete. If you are buying a ready-to-move property instead, these benefits will start from the get-go.
Moreover, if you decide to sell the concerned property within 5 years of acquisition, your claimed tax benefits till that point are considered void. These will be added to your taxable income during the next assessment.
As you can see, income tax rebate on home loans can lead to massive savings for an individual.
But, what happens in case of a joint home loan? Which of the borrower is liable to claim income tax deductions in such cases?
If you decide to opt for a home loan with a co-borrower, who also happens to be a co-owner, tax-savings potential is essentially doubled. Under Sections 80C and 24, both the borrowers are eligible for up to Rs.2 lakh tax rebate on interest payment each and up to Rs.1.5 lakh benefit on the principal repayment each.
Therefore, each of the borrowers can claim up to Rs.3.5 lakh as annual income tax benefit on a home loan.
The Union Budget 2020 introduced a proposed tax regime, which lowers existing tax slab rates. Additionally, this new regime eliminates many of the exemptions and tax-saving provisions found in the existing taxation method.
Home loan borrowers deciding to shift to this new regime should know what to expect when it comes to deductions based on loan repayment.
The new tax regime proposes that taxpayers servicing the home loan for a self-occupied property can no longer claim income tax benefit on interest payment, under Section 24 of the ITA. Thus, such a rule reduces your tax-saving potential by up to Rs.2 lakh.
However, tax rebate on home loan interest would still be applicable for individuals who rent out the property in question. These people can still avail benefits in the following manner:
However, shifting to this new system of tax assessment is optional.
You can choose to follow the tax benefits under the older regime to take advantage of home loan tax exemptions, along with several other provisions.
A home loan tax benefit calculator is a specialised online tool, which can help you assess your tax deductions while repaying such loans.
Even after acquiring knowledge regarding various tax-saving opportunities, it can be difficult for taxpayers to assess exact deductions. Doing so can also involve lengthy and complex calculations.
A tax benefit calculator, on the other hand, provides the results instantaneously. You can use it to determine the exact tax liabilities before and after the home loan benefits are accounted for.
How do you use such a calculator tool?
The tax benefit calculator figures out your income tax dues by considering certain details, which you must provide.
Generally, such a tool will ask for the following pieces of information from assessees.
Once you enter all of these details on the calculator, it will display three major pieces of information.
Firstly, it will reveal the amount of tax payable, without factoring in the home loan benefits.
Secondly, taxpayers would come to know about their liabilities after considering the several tax-saving provisions for housing loan borrowers.
Lastly, a different section will elaborate on the amount of tax you save because of your home loan repayment.
Now that you have a proper understanding of such a calculator’s functionalities consider why you must utilise the same.
These are some of the salient reasons to consider using this calculator tool before filing your taxes.
Remember that the assessment of tax liabilities involves several other deductions and exemptions, apart from housing loan benefits.
Even though this calculator can determine savings based on your home loan terms, it cannot quantify additional tax-savings through avenues.
A home loan not only helps you acquire the property you desire but also reduces income tax payments.
Nevertheless, as a borrower, you must check the exact tax rebate on home loan depending on your eligibility principal repayment and interest dues.
Please try one more time!
