subject: Give To Save A Primer On Home Loans [print this page] Most salaried people in India want to increase savings, gain greater financial freedom, yet are not aware of ways to save tax through tax-efficient investment options. Without updated and adequate information, they do not make timely investments and dole out large amount of taxes at the end of the year. Most do not even believe they need financial planning as they believe that a regular entry of their expenses is sufficient since their income is regular. But Payroll Solutions providers like TalentPro do believe that with some serious knowledge sharing, salaried people too can increase their annual income by planning their taxes with a proper understanding of tax-efficient schemes. So here is a primer on how a home loan can bring in some sizeable savings at the end of a financial year, and the pitfalls one should watch for.
First thing, Where do you start, vis-a-vis home loan? If you have available down payment (typically 15% of house value), then you can borrow balance 85% against the house you intend to buy. Though the interest rate of home loan has been on the rise, the effective interest rates are attractive even today i.e. home loan interest at 10% effectively gets reduced to 7% assuming you are in 30% tax bracket. Your payroll outsourcing services consultant should be able to guide you on this. For income tax assesses who are just taking the plunge, here are the basic did-you-know facts about the benefits of taking a housing loan:
A housing loan to purchase, construct repair or reconstruct a house is a good thing to do, because the interest paid is deductible from the total income.
Interest on home loan is deductible from your salary, provided you have possession of the house. If your house is under construction, then interest will be accrued till you get possession.
The pre EMI is deductible in five equal installments, starting from the previous year in which you've taken up control of the property
Interest paid on a fresh loan taken to repay an old loan is also allowed as a deduction.
If you've borrowed the previous year, even then the interest accrued is eligible for deduction.
Whether you want to self-occupy or want to let it out, it really doesn't matter The interest you pay for the housing loan is still deductible. Check out Section 24 of the Income Tax Act.
The interest is deductible on a due basis, even if you have not actually paid it during the year
It doesn't matter, when the construction really takes off, but you must make sure that the construction is ready-to-occupy within three years from the end of the financial year in which you have availed the loan.
The maximum interest deductible is Rs.1.50 Lakhs. But please check with your tax consultant about the current limit, for the year 2012.
You can claim full interest as deduction in the case of let out property, even if it exceeds Rs.1.5 lakh.
The danger zone is when you choose to buy your second home. Be aware that you are required to pay tax on rental income from the second house even if it is lying vacant.
Owners of vacant residential properties also have to pay wealth tax if their combined wealth exceeds Rs. 30 lakh. Wealth tax which is recurrent is 1% of the amount by which the combined value of your assets exceeds the Rs. 30 lakh limit. So, if you have a vacant flat worth Rs. 90 lakh, you may not have to pay tax on the deemed rent from next year onwards, but you will have to pay wealth tax of Rs. 60,000 (1% of Rs. 60 lakh). It would be a better alternative to invest in commercial property. It is exempt from wealth tax but the returns are also higher than those from residential property. Such a property is also eligible for deduction of interest paid on a loan as well as the 30% standard deduction from rental income
And we've just scratched the surface. Before you make your choices, you must talk to your Payroll consultant to understand the nuances of your tax planning, and what it that you can save by taking a housing loan. With every budget the rules keep changing, but there is no denying the fact that housing loans have always remained a harbinger of incentives to salaried people. So sometimes, to give is to save!
