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Understanding the Housing Loan

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Buying own house is one of the most important goal in everyone's life. Looking at the rising property prices some purchase it as investment and many wants to avoid the stay on rent and thus wants to have own accommodation. The increase in housing prices has in turn lead to increase in demand of housing loan as very few can afford to buy property on cash/lump sum. Along with the comfort of paying back loan in installments housing loan comes with lot many tax benefits. Many investors who even can afford to pay in lump sum prefer going through housing loan route as the tax benefits reduces the net outflow of interest.

Understanding housing loan tax benefits is very important as one can take multiple advantages from this if used rightly. Understanding tax benefits of interest payment under section 24, principal payment under Section 80C, benefits under joint housing loan, second housing loan etc. makes this concept more interesting.

 

Before going ahead with the details on housing loan tax benefits, lets first understand the basic terms related to the housing loan:

EMI: Equated Monthly instalment (EMI) is the term used for the monthly payments made for repaying home loan. EMI has 2 constituents – Principal and interest. Principal is the portion of loan capital amount and interest is what bank charges for that loan. In the early years of repayment, EMI consist of higher interest portion and lesser principal amount. But as time passes your principal payment increases and interest reduces.

Self-occupied house: As per Section 23(2) (a), a house property shall be termed as self-occupied property where such property or part thereof : (a) is in occupation of owner for the purpose of self-residence, (b) is not actually let out during the whole or any part of previous year; and (c) no other benefit is derived by the owner.

Deemed to be let out: If an assessee occupies more than one property, he is allowed to treat only one property as self-occupied at his option. The remaining self-occupied properties shall be treated as "deemed to be let out".

Joint home loan: Joint home loan is the loan where there is more than one borrower i.e it is a loan taken jointly by more than one person. A joint home loan can only be availed by minimum of two and maximum of six applicants. A joint housing loan is given to married couples or close blood relatives like parent and child. Usually banks insist that all co owners of the home must be co borrowers.

Pre EMI interest: No EMI gets started, till the time loan gets fully disbursed. As happens in housing loan with a construction linked plan, no EMI starts till the offer of possession by the builder. Borrower just has to service the loan interest. So the interest amount which has been paid before the starting of EMI called as Pre EMI interest or Pre construction EMI (which is only the interest part).

The Idea of explaining the above terms is to help you understand the taxation under housing loan in a much better way.

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