Apr 18, 2017

Tax Benefits of Housing Loan


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Sharing with you the Tax Benefits of Buying a Residential Property using borrowed funds:

1.       When a property is purchased by taking a housing loan, every person has to repay the said loan over a fix tenure in the form of Equated Monthly Instalments (EMI).

2.       Every EMI has a component of repayment of outstanding principal along-with interest on loan.

3.       Person repaying housing loan gets a dual benefit. One for repaying the principal amount of loan and secondly for paying interest on the said loan.

4.       Repayment of principal amount gets deducted u/s 80C of the Income Tax Act, 1961 under the total cap of Rs. 1,50,000/-. The benefit here is, sometimes the life insurance premiums paid for self, spouse and children, PPF contribution, ELSS investments are less than Rs. 1,50,000/- and hence the person ends up paying more tax on his income. So if he borrows loan and buys a residential property, he can avail maximum limit prescribed u/s 80C of the Income Tax Act, 1961.

5.       Interest paid on housing loan is eligible for deduction u/s 24 of the Income Tax Act, 1961 to the extent of Rs. 2,00,000/- till the completion of home loan tenure. If a person is paying interest more than Rs. 2,00,000/- then in that case the amount exceeding Rs. 2,00,000/- will be carried forward and set off in the subsequent year, up to a maximum period of 8 years.  

Illustration:                                                                       
                                               
Scenario 1: With Housing Loan
Particulars
Amt. (Rs.)
Salary Income
9,50,000
Less: Deduction u/s 80C

Life Insurance Premium
80,000
EPF Contribution
12,000
ELSS Investment
15,000
Repayment of Hsg. Loan
50,000
Deduction Restricted to
1,50,000
Less: Interest on Hsg. Loan
1,50,000
Taxable Income
(950000-1,50,000-1,50,000)
6,50,000
Income Tax
42,500
Edu. Cess
1,275
Total Tax Payable
43,775

Scenario 2: Without Housing Loan
Particulars
Amt. (Rs.)
Salary Income
9,50,000
Less: Deduction u/s 80C

Life Insurance Premium
80,000
EPF Contribution
12,000
ELSS Investment
15,000
Taxable Income
8,43,000
Income Tax
81,100
Edu. Cess
2,433
Total Tax Payable
83,533








From the above illustration it is evident that an individual might reduce his tax liability by fifty percent (50%) in the given scenario if he borrows a loan to invest in residential property.

It is always better to invest your hard earned money wisely and avail maximum benefit prescribed in the law and reduce the tax liability to that extent.  



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