Loan Special Home Loan Tax Implications
Both the principal and the interest components of home loans offer attractive tax benefits
Availing a home loan does not just make you the owner of a , it also brings with it attractive tax benefits.
Under section 80C of the Income Tax Act, investments in specified instruments up to Rs 1 lakh annually are deductible from an individual’s taxable income. Also included under this section are principal repayments on a home loan. So, in case you take a home loan, any payments you make towards repayment of the principal is deducted from your taxable income up to an amount of Rs 1 lakh.
Besides the principal, the interest component of a home loan also offers tax benefits. Your interest payments are considered as an expense under the head `Income from house property’ and are deductible up to an amount of Rs 1.5 lakh per annum.
Joint applicants, who are also joint owners, are eligible for tax benefits in the proportion of their share in the loan.
The interesting part is that both spouses can claim benefits up to the maximum limit.
Let’s take the case of a couple who jointly (each owning 50 per cent) and take a loan for it. If the interest and principal paid for the loan is Rs 3 lakh and Rs 1.20 lakh, respectively, each of them can claim Rs 1.50 lakh as interest deduction. This is also the maximum amount that an individual can claim.
For the purpose of tax planning, the spouse earning with the higher salary should claim a higher share to maximise his/her tax relief. Always plan your tax savings after taking all the loan benefits into account, which are the deduction and the rebate. All banks and financing institutions usually issue a provisional certificate at the beginning of the year. This is based on the Equated Monthly Installments (EMIs) payable in the financial year, with the breakup of the interest and principal to be paid. This will give you an approximate idea of how much principal and interest has to be paid in that year. Accordingly, see how this translates into a rebate or interest deduction. Based on such projections, you can assess your income and plan for other investments such as tax-saving bonds and life insurance to save tax. At the end of the year, you will get an original certificate based on the actual EMIs paid for that year. This certificate has to be submitted along with the income tax returns to claim the deduction. Fixing home loan rates One has to be careful about the manner in which the rates are fixed on a particular floating rate loan. While there is a benchmark rate present, one needs to take into consideration its nature, which can influence the way a rate is fixed. There have been several examples where the bank or financial institution actually fixed a separate benchmark rate for its , which moves and behaves differently from the prime lending rate of the bank.
This gives the financial institution flexibility to make several changes in the benchmark rate without having to rest all the loans in their portfolio. When a larger action has to be initiated, only then the prime lending rate is touched. This has also led to a situation wherein several borrowers have complained about the manner in which the rates move under different circumstances.
When the rates start falling, the revision in the rates is slower than the overall fall.
However, when the rates start rising, the rise in the floating loan rates are much faster than the overall rise.
New and existing loans the loan rate change benefit is available only in a few sectors. There are times when the lending bank or institution changes or lowers the rate on a floating rate loan. But, before existing borrowers can rejoice comes the news that the new lower rates will be applicable only to new borrowers who will be taking loans during a certain period.
This makes the entire move worthless for the existing floating rate loan borrowers because there is no change in the rates as far as they are concerned. There is also a slim chance that a person will go in for another loan to purchase a house because this is a large purchase that occurs at infrequent intervals.
How the spread works One term that is important to understand the fixing of rates as far as floating rate loans are concerned is the spread.
Often borrowers are impacted by a subtle change initiated by banks. The loan for a particular customer is decided on the basis of a benchmark rate. This can be a 50 basis points spread over the benchmark rate.
In such a position, borrowers could find that even though there is no change in the loan rates, they have to pay a higher cost because the bank has changed the spread to 75 basis points over the benchmark. In this situation, the borrowers will find that the loan cost has gone up by 25 basis points for them.
However, this can be changed only in specific conditions and hence it is the terminology used for the entire loan that is important. All this seems to be a minute part of the entire process, but is of great importance to a borrower.
Courtesy: HT Estates 20th Feb 2010
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