Thursday, 21 July 2016

Six things about Home Loan Tax incentives you didn't know

Irrespective of how much one earns one is always on the lookout of legitimate ways to save tax and this is true not only in our country but worldwide barring a few countries that have do not levy any income tax on their population. So if you have a home loan, there are numerous options available to you under the IT act that can help you save tax. There might be a few things about these sections that you might not be aware of; the discussion below focuses on six such aspects.

1.       The New Budget Allows You to Save Extra 50000!
As per the new provisions announced in the current budget additional rebate of Rs. 50000/annum on interest is available subject to certain conditions. This deduction is available for loans sanctioned in the coming financial year provided the value of the house is less than Rs. 50, 00,000 and the house loan amount does not exceed Rs. 35, 00,000. Thus first time buyers can now claim a total deduction on interest up to Rs. 250,000; this is Rs. 200,000 under section 24(b) and the additional 50,000 under section 80EE.
2.       Deduction on Interest is Available on Accrual Basis:
Interest calculation can be done either on paid basis or accrual basis. Paid means when it is actually paid while accrual is when it is due whether paid or not. Deduction on interest allowed u/s 24 is available on accrual basis; this means even if the borrower has missed paying one or more EMIs he/she can still claim the full deduction for the entire financial year as the interest was due, even if it were not paid on the said date. While not paying on time could put you on the loan defaulter list, it will not impact your tax deduction.
3.       You Need to be a Co-Borrower and a Co-owner as well to Claim Tax Deductions:
A joint home loan offers many benefits; enhanced loan eligibility and bigger tax break are two major ones. However if all applicants need to claim tax benefits then they need to be co-borrowers and well as co-owners. If only one person is paying the EMI then the other person despite being a co-owner cannot claim tax benefit. Similarly if the person sharing the EMI burden is not a co-owner then also he/she is not eligible to claim the tax benefits. The EMI sharing ratio decides the proportion in which tax deduction is available to the co-borrowers.
4.       Deduction Can Be Reversed!
If the property for which deduction under Section 80C towards principal repayment is claimed is sold before five years then the entire deduction claimed under the said section is reversed. This reversed amount is then added to the income for the year in which the property is sold. The silver lining here is that the rule does not apply to the deductions claimed for interest payment and generally in the initial years the EMIs bear a bigger interest component which is not reversed.
5.       Loans from Individuals also Eligible for Tax Breaks:
If for some reason like a low CIBIL Rating or lack of documentation one chooses to borrow from friends or relatives rather than the organized financial sector, then also tax deduction is available. Deduction u/s 24 towards interest repayment can be claimed provided the loan is taken for the purchase or construction of a house or a property. The interest rates applicable should be reasonable and a legal certificate needs to be provided by the lender to claim the deduction. The benefit allowed for tax deduction under the sections 80C and 80EE is not available if the borrower chooses to borrow from an individual.
6.       Other Charges are also Tax Deductible:
Apart from the principal repayment and interest other charges paid during the loan process can also be claimed for tax purpose. Thus charges like processing fee can also be claimed under Section 24 which also allows for claiming deduction for the interest paid on the loan. This is so because the processing which is paid for the service provided by the bank when processing the loan is treated as interest as per the definition in the IT Act.

The tax laws keep getting updated so it is important to keep yourself up to speed on them. Hopefully the above aspects can help you save a more tax on your house loan payments. 

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