How Can You Get Income Tax Benefits on Home Loans?

Admin 24 May 2024 870 Views
Knowledge Advice

Buying a home is the biggest financial investment option. It gives a better return in value for the future. The only investment that never makes anyone desperate and ultimately increases the value of the investment. One of the most important things before buying a house is to find out whether you are eligible for the loan or not. Any lender considers the current liabilities of the borrower, income, and assets before forwarding a loan. Therefore, if your loan requirement is higher than what you are eligible for, you may increase your eligibility by considering a joint housing loan. Banks allow up to six applicants for a housing loan, depending on their individual credit profiles.

Read Also: Growth of Hyderabad Real Estate

Reasons to Look For a First-Time Home Loan?

You may be able to obtain an initial home loan by a home or flat, renovation, or extension and repairs to your current home. Many banks have a distinct policy for those who want to purchase a second home or a ready-to-move-home. Be sure to get specific answers to the questions mentioned earlier from your commercial lender.

Income Tax Benefits While Taking Home Loans

1961 Income Tax Act (ITA), provides a variety of provisions for tax-free home loans. These are the three principal areas in which the borrower is entitled to exemptions:

  • Principal repayments of home loans could be tax-deductible annually as high as 1.5 thousand under section 80C ITA.
  • When you pay interest for a home loan, you have entitled to tax deductions as high as Rs 2 lakh per section 24 in the Income Tax Act.
  • If you are a new homeowner, tax-deductible tax credits in the amount of Rs 50000 are also available to be claimed following Section 80EE. This deduction occurs on interest payments made to the loan.

Note:- Be aware that tax deductions are calculated based on your taxable income, not your gross earnings.

  • For example, under the previous income tax regime, those with earnings of more than 2.5 lakh per year are subject to tax.
  • Consider that your annual earnings are Rs 4 lakh. Your home loan benefits apply to your tax-deductible earned income in this scenario. That is Rs 1.5 lakh (Rs.4 lakh-Rs.2.5 Lakh) only, not on your entire annual income.

Diverse Sections and Terms for Home Loans tax benefits

  • The above-referenced provisions provide an idea of the huge savings claimed in their tax liability for income.
  • However, you must be aware of the different rules and regulations and the relevant Sections in which the savings will be deemed to be applicable:

Section 80C (Deduction on the principal of the Home Loan Repayment)

  • Taxpayers can avail of this benefit only once with a maximum deduction of up to Rs 1.5 lakh for a specific period.
  • But, in addition to the principal repayment amount that is being calculated, this particular benefit calculation considers the cost of purchasing the property, like the stamp duty and registration fees.

Section 24 (Deduction on Interest payments)

  • Based on interest payments from a home loan, you are eligible for maximum deductions of up to Rs 2 lakhs from the tax liability for your income.
  • The property being considered must have its construction completed within five years to qualify for this benefit. It will decrease savings potential to Rs 30000 for taxpayers if it's not done.

Section 80EE (Tax Deduction of Loans Interest for First-time property buyers)

This provision only applies to you if there is no other property in your name. Other requirements to be satisfied to receive the additional benefit include:

  • The principal amount shouldn't exceed Rs.35 lakh.
  • The property must not be valued higher than Rs.50 lakh.
  • Other than these rules, you may take advantage of tax-free deductions under Section 80 EEA to purchase affordable housing.
  • In this way, taxpayers can get the additional Rs 1.5 lakh tax saving on the interest payments for home loans and the interest-related tax rebates available in Section 24. You can continue to enjoy this benefit up to the time you pay off your loans
  • Other considerations are that most of these tax breaks are only available after building the property. If you buy a ready-to-move property, the benefits will begin right from the start.
  • Furthermore, suppose you decide to sell the property within five years of purchase. In that case, the tax advantages up to that point will be considered null. They are then added to your tax-deductible income in the next assessment.

What are joint home Loan Lower Tax Obligations?

Suppose you choose to go for a home loan with the co-borrower co-owner of the property. In that case, your tax savings are effectively multiplied. In Section 80C and 24, both borrowers are qualified for a maximum of Rs 2 lakh tax-free interest paid each. In addition to Rs 1.5 lakh in tax benefits for principal repayments too.

So, all customers can claim up to Rs 3.5 lakh in an annual income tax deduction for the home loan.

Differentialities in Tax Deductions for Home Loans under the Old and New Regimes

The Union Budget 2020 introduced a tax system that reduces existing tax slabs. The new tax regime removes many tax-saving exemptions and provisions in the current tax system.

Borrowers of home loans who choose to switch to this new system should be aware of what to expect regarding deductions based on their loan repayment.

The new tax system stipulates that taxpayers servicing the home loan. An unoccupied home is no longer eligible to claim the tax-free income for interest payments following Article 24 in the ITA (Income Tax Act). Therefore, this rule can reduce your tax savings by as much as Rs 2 lakh.

But, a tax credit on the interest on a home loan could be available to those who lease out their property that is being rented out. The renters can receive benefits as follows:

  • The standard deduction is set to 30% of the net rental income. It is possible to calculate the net rent by calculating the total rental income you earn from the property less the applicable taxes imposed by the municipality.
  • After the standard deduction has been established, the taxpayer can claim home loan tax advantages on debts incurred on interest, following Article 24B of the Income Tax Act.

What criteria will your bank use to determine the loan's eligibility?

The bank will determine your capacity to repay when deciding the eligibility for a home loan. The capacity to repay is determined by your disposable or surplus income per month and other variables such as the income of your spouse, assets, obligations, stability of income, etc. The bank's primary goal is to ensure that you can return the loan on time and at the end of your use. The greater your monthly disposable income, the more you are eligible to borrow. A typical bank will assume that 55-60% of your surplus or disposable income can be used to pay back the loan. Many banks calculate the income to pay “EMI” payments using the gross income of an individual and not his disposable income.

  • The amount you can borrow depends on the term of the loan and the interest rate. These factors determine your monthly income and outflow, which in turn is based on your income per month. Banks usually set an upper age threshold for applicants to home loans.

What types of documents are typically required to grant approval of loans?

Alongside all legal documents related to the purchased home and the mortgage application, banks may ask for identification and Residence Proof as well as the most recent salary slip. And Form 16 ( for those who are business owners or self-employed ) as well as the last six months of bank statements or Balance Sheet, if required. It is also necessary to complete the application form with a photo. The loan application should include the list of documents that need to be submitted. Banks usually offer one of the following options for loans that include floating rate home loans and fixed-rate home loans.


About Author

Jatin Dubey

An enthusiastic content writer who is a law graduate and has been working as Real Estate Consultant for around 9 years.
He has worked with top Real Estate Agencies and Builders in Delhi, Bangalore and Pune. His skills to perform market analysis and explore high potential localities has helped many clients in the past.

An enthusiastic content writer who is a law graduate and has been working as Real Estate Consultant for around 9 years.
He has worked with top Real Estate Agencies and Builders in Delhi, Bangalore and Pune. His skills to perform market analysis and explore high potential localities has helped many clients in the past.

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