The tax benefits provided by the government to buyers who opt for home loans have been one of the key driving factors that have made the home loans popular across segments of the society today. There are different ways be which a home loan repayment can reduced the overall tax burden thereby earning some savings for you in the long run. Especially for people who fall in the highest tax brackets these exemptions could mean significant amount in savings on an annual basis itself. In fact in some of the Tier II and II towns it is less costly to buy a house and pay the EMIs than stay in a rented accommodation and pay monthly rentals.
Components of Tax Exemptions in Home Loans
There are two basic components of repayment in any home loan – the principal and the interest. There are separate tax benefits available for both the elements under the Income Tax Act.
The Principal: Section 80C deals with exemption on repayment of principal and has a cap of Rs 1,00,000/- per annum. However in order to avail this benefit, the borrower must live in the house for which the loan has been taken. Therefore when the house is under construction or the borrower is not physically residing in that house this exemption cannot be claimed. But a possible exemption to this clause is available in case the owner is staying another city.
The Interest: The second component of the loan repayment that is the interest part is looked after in the Section 24 of the Income tax Act and is applicable to a maximum limit of Rs. 1,50,000/- per annum. In order to claim benefit under this section on the interest paid during that year on the home loan the borrower need not live in the house. The amount of interest paid by the borrower as certified by the lending institution is deducted from the taxable income thereby reducing the overall tax liability. Under this section there is no limit on the number of houses for which the loan has been availed. Additionally there is no restriction of location of the property for exemption under Section 24. The only cap under this Section is the maximum limit of Rs 1,50,000/-.
Combined effect: Thus the combined power of both the elements can get a borrower a maximum benefit of Rs. 2,50,000/- exemption from taxable income. Depending on the gross annual income of the individual this reduction in taxable income may work out to be a substantial reduction in the total tax paid for that year. At the highest point this reduction can save up to Rs. 83333/- per annum at the rate of 30 % of income in the bracket which is equivalent to saving almost Rs. 7000/- per month as tax rebate. To top it all there is exemption on stamp duty and registration charges while acquiring the property under Section 80C.
Illustration
| Income Description | Amount |
| Total taxable income (After standard deductions) | Rs. 10,00,000/- |
| Principal Repayment (Home Loan) | Rs. 1,20,000/- |
| Interest Repayment (Home Loan) | Rs. 1,70,000/- |
| Total Deductions (Principal +Interest) | Rs. 2,50,000/- |
| Net taxable Income | Rs. 7,50,000/- |
(Note in this illustration, the taxable income deducted is Rs. 250000/- which implies a direct saving of Rs. 83333/- per annum @ 30% tax applicable in that slab.)
Today availing a home loan can provide various fringe benefits in terms of relief in income tax and the trend is likely to continue in the years to come as the government has a policy of encouraging the construction sector in order to achieve overall growth of the economy.