Pay just 6.5 % interest
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Read the IT Act carefully, whip out your calculator and work out some smart calculations
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The benefits available for home loan repayment under the Income Tax Act, 1961, if appropriated towards the interest paid on loans, will bring down the effective interest to 6.5-7 per cent. Here is an effort to substantiate the same.
The income tax benefits available for home loan borrowers are:
Under Section 24 of the IT Act 1961, interest paid up to Rs. 1,50,000 is set off as loss from salary/business income, for self-occupied property (if property is acquired earlier to April 1, 1999, interest up to Rs. 30,000 per annum is allowed).
For rented out property, entire interest paid is deductible from taxable income after computing the rental income. If loan is availed for house renovation, interest up to Rs. 30,000 p.a. is allowed as deduction.
Under Section 80C, home loan borrowers can claim deduction up to Rs. 1,00,000 from taxable income on the loan repaid during the year (along with specified saving instruments).
The entire PEMI interest amount (the interest amount paid during construction period), is allowed as a deduction under Sec. 24, equally over five years (20 per cent of total interest paid), starting from the year in which the construction is completed.
Registration cost
Under Section 80C, along with other specified savings and home loan repaid, the amount spent for stamp paper and registration cost on registering house property up to Rs. 100,000 is deductible from total income.
Let us analyse the benefits for Ashok, who is working in a MNC with a taxable income of Rs. 900,000 p.a. He needs to pay income tax of Rs. 180,250 as per the slabs applicable for the assessment year 2009-10, as per Table A.
Plus, there is education cess of 3 per cent on the income tax payable.
10 per cent surcharge, if the taxable income is Rs. 10 lakh and above.
For female assessee, the ceiling is Rs. 180,000.
For senior citizens, ceiling limit is Rs. 225,000.
The details of the loan taken by Mr. Ashok are indicated in Table B.
Since Mr. Ashok has occupied the house on which loan is availed, he can claim deduction of Rs. 150,000 for the interest paid on the home loan (actual interest paid is Rs. 219,807). Thus, his taxable income reduces to Rs. 750,000 (Rs. 900,000 – Rs. 150,000).
Saving Rs. 46,350
As per the income tax slabs, his income tax burden comes down to Rs. 133,900 (including education cess) from Rs. 180,250, a saving of Rs. 46,350. If this saving of Rs. 46,350 is appropriated towards interest paid on home loan, the effective interest on home loan reduces to 8.67 per cent, as per Table C.
Mr. Ashok can also claim deduction up to Rs. 100,000 towards the principal loan amount paid. Since he was burdened with a whopping EMI of Rs. 34,773, he could not save in other specified instruments such as Provident Fund and LIC premium.
By claiming deduction of Rs. 100,000, his taxable income got reduced to Rs. 650,000. And as such, his income tax burden got reduced to Rs. 103,000, thus earning him additional savings of Rs. 30,900.
If this additional saving of Rs. 30,900 is appropriated towards interest paid on home loan, the effective interest on home loan reduces to 7.12 per cent, as per Table D.
Let us analyse another situation wherein Mr. Ashok has an ancestral house to live in and has rented the property for which home loan is availed.
Once property is rented out, the entire interest paid on home loan is deductible from the taxable income, after adding the rental income. The rent per month is Rs. 5,000, which works out to Rs. 60,000 p.a.
Rental value
The rental value is calculated as per Table E.
After adding the rental value, Mr. Ashok’s taxable income becomes Rs. 929,000 (Rs. 900,000 + Rs. 29,000). Then the tax liability becomes Rs. 189,211.
Since the entire interest paid on home loan (Rs. 219,807) is deductible from taxable income, the taxable income becomes Rs. 739,789. The tax liability reduces to Rs. 130,745; thus Mr. Ashok will save Rs. 58,465.
If this savings of Rs. 58,465 is appropriated towards interest paid on home loan, the effective interest on home loan reduces to 8.06 per cent, as indicated in Table F.
Further deductions
Further, Mr. Ashok can claim deduction of Rs. 100,000 towards the principal loan paid. Then his taxable income reduces to Rs. 639,789 (Rs. 739,789 – Rs. 100,000).
Accordingly, the tax liability reduces to Rs. 99,845, thus an additional savings of Rs. 30,900 (Rs. 130,745 – Rs. 99,845).
If this additional savings of Rs. 30,900 is appropriated towards interest paid on home loan, the effective interest on home loan reduces to 6.5 per cent, as per Table G.
The example shows the effective interest on home loan for the first year of loan repayment for a loan of Rs. 20 lakh with particular income and other parameters as mentioned.
Benefits to continue
For consecutive years also, similar benefits will be available. However, the effective interest on home loan will differ when the income and loan parameters change.
In any case, the income tax benefits on the home loan repayment will be significant and highly attractive.
(The author is a Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail.com)
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