Key Tax Benefits of Home Loans
As per the Income Tax Act of 1961, one can claim a home loan tax exemption on the principal repayments and interest payments made towards their home loan for the following amounts: Upto ₹1.5 Lakh u/s 80C for principal repayments; ₹2 Lakhs worth of housing loan tax benefit available under Section 24(b) of the Income Tax Act; the actual interest amount paid in a financial year or ₹1.5 Lakh whichever is lower under the Affordable Housing scheme u/s 80EEA.
It is important to note that the housing loan tax benefit available under Section 80EEA is in addition to Section 24(b). Thus, one can avail of a total tax rebate on a home loan up to the applicable tax rate on the amount of ₹3.5 Lakhs for the interest payments made under their home loan if they meet the applicable eligibility conditions of both Sections 24(b) and 80EEA. The maximum possible tax rebate for someone in the 30% tax bracket can be more than ₹1.05 lakh.
Section 24(b) of the Act allows individuals owning a residential property to claim a house loan tax exemption of up to ₹2 Lakhs for the interest payments made towards their home loan if the property is occupied by them or their family or if it is vacant.
However, if the property has been let-out, the actual amount paid as the interest towards the home loan, without any upper limit for a house loan tax exemption, can be claimed.
How to Maximise Interest Rate Discounts in 2023
Listed below are a few tips to maximise interest rate savings:
Prepayments – When there is repayment on loans, the principal outstanding gets reduced and subsequently, there is a significant reduction in the interest cost, leaving more cash in one’s hand out of the monthly income.
Home loan balance transfer – Home loan balance transfer is a very well-known method that helps to reduce the monthly interest cost, normally an existing loan is transferred to a new bank or finance company that offers a lower interest rate.
Short repayment tenure – Short repayment tenure will ensure that the overall interest cost remains low; however, if someone goes for a shorter repayment tenure, the monthly repayment amount may turn out to be very substantial, eating into their potential savings or investments.
Higher down payments – When someone makes higher down payments, the subsequent EMIs and interest costs remain low, thus putting a lesser financial burden on them.
Good CIBIL score – A good CIBIL score represents timely repayments of EMIs and loans, and this helps to negotiate better terms with a lower interest rate for any subsequent loans that someone is looking at.
Good banking relationship – If one has a good banking relationship with their banker, there are high chances of getting faster credit approvals at lower interest and other costs. The bankers are already in possession of all the transaction-level details like bank statements, CIBIL Report, and thus can offer better terms.
Opt for joint home loan – If one’s spouse is also working with a stable job or income, always go for a joint home loan as this provides comfort to the lender in terms of credit risk and they may offer much better terms with lower interest and other costs.
Disclose other income – In case there is other income apart from salary, it is always advisable to disclose the same to the lender who can lend at much better rates as they will have a better assurance on the repayments.
Sound guarantor – If the guarantor is a person with a strong credit profile and sound financial health, who could be from the family or a close friend, then there is a high chance of obtaining better credit terms on the loan with reduced interest rates.
Stay updated on the prevailing interest rate offers – Multiple banks and institutions provide different interest rate offers on a home loan during different periods based on prevailing Repo rates. It is always recommended to compare different options and go for a reputed bank or financial institution as there may be chances of fraud and disguised hidden costs otherwise.
Tips to Utilise Home Loan Tax Benefits
Follow the below-recommended process to claim housing loan tax benefit:
Co-applicants – Ensure that the applicant or co-applicant is the owner or co-owner of the property.
Tax rebate on home loan – Make use of the entire house loan tax exemption u/s 80C for principal repayment up to ₹1.50 lakhs and the housing loan tax benefit for interest deduction u/s 24(b) and u/s 80EEA up to ₹3.50 lakhs which would ensure the maximum tax rebate on home loan.
Home loan interest certificate – Collect the home loan interest certificate from the lender. Send the home loan interest certificate to the employer for TDS adjustment. If the loan interest certificate is not submitted to the employer, submit the same when filing the income tax return.
Self-employed individuals – Self-employed individuals only need to keep all these documents handy if any income tax queries arise in the future.
Strategies to Reduce Interest Rates With Home Loan Calculators
The following strategies can help reduce interest rates:
Short loan tenure: Shorten the loan tenure because loans with shorter tenure will entail a lesser interest burden compared to longer tenure loans. However, this may strain savings and investments.
Part payments – Part payments before the increase in interest rate for the floating rate cases can ensure that the interest cost on the mortgage loan is minimal.
Compare interest rates from different lenders – Simulate the EMI repayment schedule with different home loan interest rates and opt for the financier which has the least cost option on an overall basis.
Balance transfer option – Balance transfer for lower interest rates can be done but there is always the risk involved in terms of certain hidden costs and fraud with unreputed lenders.
Increase down payments – Maximise the down payment as this will ensure that the interest cost burden gets reduced over the loan tenure.
Increase EMI amounts – Increasing the EMI amount will also help to reduce the interest burden over the balance tenure of the loan.
The Benefits of Prepayments and Repayment Plans
Early repayments and part payments can ensure an improved CIBIL score, savings on the interest amount, and reducing the debt burden.
While early prepayments would lead to loan closures and thus make the entire interest cost due in the future as NIL, partial prepayments can reduce the future interest cost to a certain extent. At the same time, early repayment of loan EMIs can help to improve CIBIL scores.
Ideas to Get Your Finances in Order for the Year Ahead
The following are a few recommendations to plan your finances for the upcoming year: Plan for emergencies by keeping aside at least 6 months of the Gross income as liquid money; ensure to take adequate health insurance for self and dependents; get adequate life cover for yourself.
Conclusion
With the above reading on various housing loan tax benefits which can be availed and the various tips and strategies to keep the interest cost at a minimum, one can do thorough research and plan the finances accordingly. One important point which has to be kept in consideration is that the higher loan amount with a higher interest burden does not provide a high housing loan tax benefit as the tax saving on home loan is restricted to a house loan tax exemption on account of interest payment up to a home ₹3.50 lakhs maximum for combined housing loan tax benefits u/s 24(b) and 80EEA. Thus, the tax rebate on home loan would be restricted up to the applicable tax rate on the aforesaid amount of ₹3.50 lakhs.
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25 June 2024
7 mins read
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