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How Can a Home Loan Help One Save on His Taxes -Tax Planning?

Tax Planning for Your Home Loan:

A home is considered a once in a lifetime investment. True financial planning involves not only planning for the purchase of the house but also availing of the tax deductions in order to speed up the process of loan repayments. Housing is a sector which the Government maintains a prime focus on. Low cost housing and providing all citizens of India a roof over their head is one of the main agenda’s of the Government .If one is purchasing a house, repairing his house or renovating the house a tax benefit can be availed. So how can one avail of tax benefits in order to save on the home loan?

What are home loans?

  • Home loan is financed by banks to buy or repair/renovate a house. Home loans are provided based on the market value, mainly estimation given by banks or the registration value of the property. Banks do not consider other charges like Stamp Duty, Registration Charges while considering the home loan
  • Home loans are repaid through monthly installments (EMI) spread over 20 years. Some of the banks provide housing loans for a tenure extending up to 25 - 30 years

Why does one take a home loan?

One can avail a loan for the construction of his house. Loan is available for the construction of a new home on a said property. The documents that are required in such a case are slightly different from the ones submitted for a normal Housing Loan. If one has purchased this plot within a period of one year before starting construction of the house, most HFCs will include the land cost as a Component, to value the total cost of the property. In cases where the period from the date of purchase of land to the date of application has exceeded a year, the land cost will not be included in the total cost of property while calculating eligibility.

What is a home improvement loan?

These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan facility, after obtaining the requisite approvals from the relevant building authority.

Tax Planning for that Home Loans:
What are the taxation aspects for a home loan?

  • Home loan Equated monthly installments have two components Principle and interest. These two are treated separately for the purpose of taxation
  • The repayment of the principle amount of the loan up to INR 1 Lakh per annum is eligible for a tax deduction under Section 80 C. One is eligible for a deduction under this section irrespective if one stays on the property or gives it out for rent.
  • The amount one pays as stamp duty when a house is bought and the amount one pays for the registration of the documents of the house can be claimed as deductions under section 80C up to INR 1 Lakh.
  • Under Section 24 one gets a tax deduction on the interest portions up to an amount of INR 1.5 Lakhs .If the property is self occupied then this is the maximum deduction one can avail .If ones property is let out or deemed to be let out then the entire interest portion one pays on the home loan can be claimed as a deduction against the rental value or the deemed rental value .If one lets out his property then the actual amount paid as interest is eligible for a deduction. There is no maximum limit. This translates to be very useful when one stays in a self occupied house and gives the other house on rent.
  • If one takes a loan for the purpose of reconstruction, renovation or the repair of one’s property then under Section 24 (b) the amount of deduction is restricted to INR 30000.One can claim this deduction irrespective of whether one is residing in the house or has given it on rent
Let us consider the following example in order to understand tax savings on a home loan. Mr Ramesh earns a salary of INR 7 Lakhs per annum. He takes a loan of INR 35 Lakhs for a tenure of 20 years. The rate of interest charged on the home loan is 10.25%.The EMI is INR 34,358 per month or a yearly value of INR 4,12,290

Gross salary INR 7 Lakhs
Loan amount INR 35 Lakhs
Tenure 20 years
Rate of interest 10.25%
EMI (Yearly) 4,12,290
Principal (Yearly) INR 56,129
Interest (Yearly) INR 3,56,162

Table showing the yearly loan breakup

Year EMI (Year) Principal (Year) Interest (Year) O/S Balance
1 4,12,290 56,129 3,56,162 34,43,871
2 4,12,290 62,160 3,50,130 33,81,712
3 4,12,290 68,839 3,43,451 33,12,872
4 4,12,290 76,236 3,36,054 32,36,636
5 4,12,290 84,428 3,27,862 31,52,208
6 4,12,290 93,501 3,18,790 30,58,707
7 4,12,290 1,03,548 3,08,743 29,55,160
8 4,12,290 1,14,674 2,97,616 28,40,485
9 4,12,290 1,26,997 2,85,293 27,13,488
10 4,12,290 1,40,643 2,71,647 25,72,845
11 4,12,290 1,55,756 2,56,534 24,17,089
12 4,12,290 1,72,493 2,39,797 22,44,596
13 4,12,290 1,91,028 2,21,262 20,53,568
14 4,12,290 2,11,555 2,00,735 18,42,013
15 4,12,290 2,34,288 1,78,003 16,07,726
16 4,12,290 2,59,463 1,52,827 13,48,262
17 4,12,290 2,87,344 1,24,946 10,60,919
18 4,12,290 3,18,220 94,070 7,42,698
19 4,12,290 3,52,415 59,875 3,90,284
20 4,12,290 3,90,284 22,007 0

Mr Rakesh invests INR 1 Lakh per annum in a public provident fund in order to avail deductions under Section 80 C of the income tax act. The tax liability of Mr Rakesh can be calculated as follows :

Salary of Mr Rakesh INR 7,00,000
Less deduction under tax saving instruments INR 1,00,000
INR 6,00,000

Calculation of Mr Rakesh’s tax liability if no home loan has been taken

Slabs Rate Tax liability
INR 0 - 2,00,000 0 0
INR 2,00,000-5,00,000 10% INR 30,000
INR 5,00,000-6,00,000 20% Mr Rakesh pays 20% of INR 1 Lakh = INR 20,000
Net Total INR 50,000
Education Cess 3% INR 1,500
Total tax liability without a home loan INR 51,500

If Mr Rakesh avails no tax deductions on his home loans he pays an income tax of INR 51500.

Now let us calculate Mr Rakesh tax liability after taking a home loan

  • Interest portion deductible up to INR 1,50,000 per annum under Section 24
  • Actual interest paid in the first year = INR 3,56,162
  • Deduction available is only a maximum of INR 1,50,000 irrespective of actual interest paid.
    Mr Rakesh earns INR 7 Lakhs per annum. In addition to the deduction of INR 1 Lakh on the tax saving instruments (PPF) an additional deduction of INR 1,50,000 per annum is available on the interest component of the EMI of the housing loan. This translates to INR 600000-INR 1,50,000= INR 450000.

Calculation of Mr Rakesh’s tax liability if a home loan has been taken

Slabs Rate Tax liability
0 -2,00,000 (INR) 0 0
2,00,000-4,50,000 (INR) 10% INR 25,000
Net Total INR 25,000
Education cess 3% INR 750
Total tax liability with a home loan INR 25,750

Mr Rakesh saves INR 51,500 – INR 25,750 or a net saving of INR 25,750 if he avails deductions under Section 24 on the interest component of the home loan.

Tax paid without availing home loan benefits INR 51,500
Tax paid after availing home loan benefits INR 25,750
Net saving on tax after taking a home loan INR 25,750

There is a famous saying “ Home is where the heart belongs” .One can not only buy his own home but also save on tax .This is a double bonanza one can get. Think…Twin benefits..One’s own house as well as tax benefits. Use Tax Planning to achieve your needs.

Financial Planning
Tax Planning
Investment Planning