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Home loans can help you save tax

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Before you buy that residential property, brush up on your home economics

Tax benefits on principal

Equated monthly instalments (EMIs) are typically divided into principal (the amount you took as loan) and interest (the cost of servicing the loan). Principal is allowed as a deduction from your gross total income (subject to an overall cap with other eligible investments of 1.5 lakh)

Union Budget 2018: Complete Coverage

Tax benefits on interest paid

Interest payable on ‘self-occupied’ property is subject to a maximum deduction of 2 lakh under the head ‘Income from House Property’. This reduces your total tax liability. But to claim this, acquisition or construction should be completed within 5 years from the end of the financial year in which the loan was taken. If not, the deduction will be limited to 30,000.

Additional deduction of 50,000 is allowed for first-time home buyers if certain conditions are fulfilled If you have rented out your property, the difference between the rent you get after adjustment of municipal taxes, standard deduction and interest on housing loan is your ‘loss’. For example, if the annual rent is 5 lakh, after considering standard deduction @30% of gross value (which is generally rent), 3.5 lakh is your loss. As per Finance Act 2017 amendment, you can set off only 2 lakh of such loss against your other income, say salary. The balance (surplus loss of 1.5 lakh), can be carried forward over eight years. However, it can only be set off against your rental income

Why not to go alone on a home loan, and other useful pointers

It makes tax sense to purchase the new apartment jointly – say with your spouse, then both of you are entitled to a deduction of 2 lakh each for interest. In case you have a working son/daughter and the bank is willing to split the loan three ways, all three can avail deduction up to 2 lakh each on self- occupied property

A ready-to-move flat could cost more. Booking an under-construction flat may work out cheaper as I-T laws permit you to claim the total interest paid during the predelivery period as a deduction in five equal instalments starting from the financial year in which the construction was completed or you acquired your apartment (generally this denotes the date of possession). Of course, the maximum you can claim as a deduction per year continues to be 2 lakh, in case of self-occupied property

Interest on a loan taken from an employer, friend, or even private lender is eligible for deduction, but you should obtain a certificate from the lender. Note that principal repayment is not eligible for deduction under 80C

Expense incurred towards repair and maintenance are not allowed as a deduction from income from house property. However, a standard deduction @ 30% of gross value (which is generally the rent received) is allowed to compensate for repair and maintenance expenses of a let-out house property. Also, municipal taxes paid during the financial year is allowed as a deduction

It’s best to rent out your second home from an I-T perspective. If you have not let it out, it will still attract tax on its expected market rent (known as deemed value). It’s better to pay tax on rent which you actually earn

Updated: February 2, 2018 — 3:33 am

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