As we approach the end of the financial year, a lot of people start worrying about their tax planning, looking frantically for ways to save taxes. A lot of people plan taxes over the year, but the number of people waking up in the last quarter is also substantially high.
Home loans have played a very significant role in reducing the tax liabilities of a number of taxpayers. Here, let us look at some of the finer points that everyone needs to know before taking a home loan for tax-saving purpose.
Tax benefits from home loans can be divided into two sub-sections. One, the repayment of the principal loan amount and, two, the repayment of the interest on the loan. Tax benefits on home loans are governed by different sections of the income tax act. The amount paid towards principal repayment is allowed for tax deduction under section 80c of the income tax act while the amount paid as interest comes under Section 24 of the Income Tax Act, 1961.
Tax benefit on principal repayment (Section 80C)
The total amount paid towards repayment of the principal loan amount is allowed for tax deduction under Section 80c. The maximum deduction allowed under the act is R1 lakh, which includes funds invested in PPF accounts, tax-saving FDs, equity-linked savings scheme (ELSS) and other financial instruments, along with repayment of the principal amount.
Tax benefit on interest repayment (Section 24)
The total amount paid towards interest on the principal loan amount is allowed for tax deduction under Section 24 of the I-T Act. The maximum limit for tax deduction under the section is limited to R1, 50,000. If the property is self-occupied, the deduction is allowed for only one such property. Another important point is that if the property is not constructed or acquired within three years of taking the home loan the interest benefit comes down to R30,000 per month.
Let’s say the principal repayment amount on a home loan is R1,10,000 and the interest payable for the year is R1,60,000. Hence, the total deduction allowed as per Section 80C and Section 24 would be the total of R1,50,000 towards interest payable and R1,00,000 for principal repayment.
Taking a home loan to save taxes: Things to remember
Loan is often described by financial experts as a dreaded four-letter word everyone wants to avoid. There are prudent ways to use loans, especially home loans, so that they can bring in