Spend, Save and Invest Smartly

Tax Benefits on Home Loan



It is the festive season. You have just spotted the house of your dreams. A bank is offering home loans at competitive rates. This is the opportunity you have been waiting for.

Yes..... you also get tax benefits when you avail a home loan.

What are home loans?

You are 30 years of age and earn INR 12 Lakhs a year. You stay in a rented house in Kolkata paying INR 25000 as rent. You have availed a home loan of INR 40 Lakhs for tenure (time period) of 20 years. You pay an interest on the home loan at 11%.

Your home loan break up

Year EMI (Year) EMI Principal(Year) EMI Interest(Year) O/S Balance
1 4,95,450 58,333 4,37,117 39,41,667
2 4,95,450 65,084 4,30,366 38,76,583
3 4,95,450 65,084 4,30,366 38,76,583
4 4,95,450 81,018 4,14,432 37,22,950
5 4,95,450 90,393 4,05,057 36,32,557
6 4,95,450 1,00,853 3,94,597 35,31,704
7 4,95,450 1,12,524 3,82,926 34,19,180
8 4,95,450 1,25,545 3,69,905 34,19,180
9 4,95,450 1,40,073 3,55,377 31,53,562
10 4,95,450 1,56,282 3,39,168 29,97,280
11 4,95,450 1,74,367 3,21,083 28,22,913
12 4,95,450 1,94,544 3,00,906 26,28,369
13 4,95,450 2,17,057 2,78,393 24,11,312
14 4,95,450 2,42,174 2,53,276 21,69,138
15 4,95,450 2,70,199 2,25,251 18,98,939
16 4,95,450 3,01,466 1,93,984 15,97,473
17 4,95,450 3,36,351 1,59,099 12,61,122
18 4,95,450 3,75,273 1,20,177 8,85,849
19 4,95,450 4,18,699 76,751 4,67,150
20 4,95,450 4,67,150 28,300 0

Your salary slip

Before tax exemption(INR) After tax exemption (INR)
Basic Salary 6,00,000 6,00,000
Dearness allowance 23,000 23,000
House Rent allowance 3,00,000 62,300
Medical reimbursement 25,000 10,000
Transport allowance 12,000 2,400
Hostel allowance 10,000 10000
Children's education allowance 5,000 5000
Bonus 147740 147740
Provident Fund 74760 74760
Professional tax 2,500 2500
Total 12,00,000 9,37,700

Your fully taxed allowances

  • Basic salary is fully taxed.
  • Dearness allowance is fully taxed.
  • Bonus is fully taxed.

Your partially taxed allowances

There is a rule which you need to know to calculate your House Rent Allowance.

  • The HRA (House Rent Allowance) given to you by your Company.....Condition 1
  • The actual rent you pay - 10% * (Basic salary + Dearness allowance).....Condition 2
  • 50% of (Basic Salary + Dearness allowance) in case you reside in a Metro City and 40% of (Basic Salary + Dearness allowance) if you reside in any other city.....Condition 3 You have to pay tax on the actual HRA received from the employer minus the amount which is the least among the above three conditions. Condition 1
  • You get a HRA of INR 300000 as part of your salary.
    Condition 2
  • You pay INR 300000 rent a year – 10% (INR 600000 +INR 23000) = INR 237700
    Condition 3M
    You stay in Kolkata
    50% of (Basic Salary + Dearness allowance)
    =50% (INR 600000 + INR 23000) = INR 311500.
    The least among the following = INR 237700
    You have to pay tax on INR 300000 – INR 237700 = INR 62300

Medical reimbursement

Exempt up to INR 15000 a year. You pay tax on the remaining amount of INR 10000.

Transport allowance

You get a tax exemption up to INR 9600.You pay tax on INR 12000 – INR 9600 = INR 2400.

Hostel allowance

It is exempt up to INR 300 a month for 2 children. You are unmarried hence full INR 10,000 is taxed.

Children’s education allowance

It is exempt up to INR 100 a month for 2 children. You are not married and the full INR 5,000 is taxed.

Provident Fund

Your contribution is fully tax deductible under Section 80C up to INR 150000. Hence INR 74760 is fully deducted.

Professional tax

Assuming Professional tax is paid by the employer, it is first shown in gross salary and then deducted under section 16 (iii).

Your taxable salary after availing exemptions is INR 937700.

Deductions under Section 80 C

  • Your repayment of the principal amount of the home loan (EMI Principal) up to INR 1.5 Lakh per annum is eligible for a tax deduction under Section 80 C.
  • You repay (EMI Principal) of INR 58333 for the year and avail a deduction for this amount.
  • You get a deduction of INR 74760 on the EPF under Section 80 C of the income tax act.
  • You invested INR 1 Lakh in a PPF and got only INR 16907 as a deduction because you had already availed deductions on the EMI (Principal) of the home loan and the EPF.

Deductions under Section 24 B

  • You get a deduction of INR 2 Lakhs per year on the home loan (EMI Interest) if your property is self occupied.
  • You pay an interest of INR 4,37,123 and can avail a deduction of only INR 2 Lakhs on this amount.
Loans
Commercial Vehicle Loan