Home loan is the biggest liability for most of us. It takes away anywhere between 25-50% of our income in EMI. Fortunately, Government has provided some relief in the form of tax rebates. We will discuss, the tax rebates, some scenarios, and the nitty-gritty of tax calculations for the current year.
Tax Rebates and Extent of Tax Deduction
Home loan payment consists of two parts, principal component and interest component. Tax rebate is possible on both of them currently. The tax rebate is possible on 1.5 lakhs of interest as per section 24(b). The principal gets tax rebate on maximum of 1 lakh under section 80C. Most of us claim PPF, PF, insurance, ELSS and few more (as applicable to individual cases) under 80C. If the total amount claimed is less than 1L, we can add only that part of principal for tax rebate which caps the claim at 1L.
So for example, if X claims 70,000 under 80C with PF and insurance, X can only claim another 30,000 for the principal that he pays on home loan.
There are a few conditions to be satisfied in order to claim this rebate:
1. The loan should have been taken after 1st April, 1999.
2. The possession must be within 3 years from the year in which loan was borrowed.
If any of the above conditions are not met, the claim is only Rs. 30,000.
Let's discuss some scenarios and to see how much rebate is possible to make this clear.
Example 1: Loan and home in the same financial year
You took the loan and got the possession of home in the same financial year. A financial year is 1st Apr to 31st Mar. Your loan profile is as follows:
| Home Loan | 30,00,000 |
| Tenure | 20 years |
| EMI | 25,000 |
| Year of beginning of EMI | Apr, 2010 |
| Year when the possession took place | Jan, 2011 |
| EMI paid in a year (till March, 2011) | 3,00,000 |
| Principal paid | 60,000 |
| Interest Paid | 2,40,000 |
Deduction under 80C (100000 limit)
If you have 60,000 claimable deductions under 80C from PF, PPF, ELSS, and insurance, you can claim maximum of 40,000 of your principal.
Deduction under 24(b)
You can claim maximum of 150,000. Hence you will only claim 150,000 out of 240,000 of interest paid.
Example 2; Loan now, Home later
You took the loan and got the possession of home after 1 financial year. Your loan profile is as follows:
| Home Loan Amount | 20,00,000 |
| Tenure | 20 years |
| Year of beginning of EMI | Apr, 2010 |
| Year when the possession took place | Jan, 2012 |
| No of financial years in Pre-possession | 1 |
| EMI in pre-possession phase | 15,000 |
| EMI for 1 year in pre-possession | 1,80,000 |
| Principal part of EMI in pre-possession | 50,000 |
| Interest part of EMI in pre-possession | 1,30,000 |
| 1/5th of Interest part of EMI in pre-possession | 26,000 |
|
|
|
| EMI after possession | 15,000 |
| EMI in a year after possession | 1,80,000 |
| Principal part of EMI after possession | 50,000 |
| Interest part of EMI after possession | 1,30,000 |
In the pre-possession period, you can claim tax rebate on principal only under 80C. Hence when you file taxes in March, 2011, you can claim Rs.50,000 deduction under 80C (if it doesn't exceed the total permissible amount of 1 lakh).
Once you take the possession of the house, you can claim the rebate of pre-possession period in 5 equal instalment (in 5 years) subjected to the condition that the pre-possession claim and current year claim do not exceed 1.5 lakhs under 24(b) and 1 lakh under 80C. Let's do the math.
Deduction under 80C (100000 limit)
You can claim principal of 50,000 for the current year and another 10,000 for the pre-possession year, i.e. 60,000 in total. If you have 50,000 claimable deductions under 80C from PF, PPF, ELSS, and insurance, you can claim maximum of 50,000 of your principal.
Deduction under 24(b)
You can claim the interest of 1,30,000 for the current year and another 26,000 of the pre-possession year, i.e. 1,56,000 subject to the condition of 1.5 L limit. Hence you maximum claimable amount is 1.5 L.
Example 3: Loan is in my name but homeowner is someone else
You can get a home loan for a relative. If the home is in your relative's name, you cannot claim the tax benefit even if you pay the EMI. However, to avail the tax benefit, you can sign yourself as co-owner of the property.
Example 4: Possess the home but it is given out on rent:
This is a typical concern for many people who cannot live in their home because of personal or professional reasons and instead rent it out. They themselves live in a rented apartment. Here the benefits can be availed as follows:
- You can still claim the tax benefit of 1.5 lakhs on interest under 24(b) and on principal under 80C subject to a limit of 1 lakh.
- You can claim HRA because you are living in rented apartment.
- The rent you are earning from your apartment will be taken as your income and taxed accordingly.
If you have not rented your apartment, it will still be taxed on a notional amount.
Example 5: Joint home loan
It is always better to go for joint loan to save more tax. Remember that the limit of 1.5 lakhs on interest and 1 lakh on principal under section 80C is applicable to individuals. Let's take an example:
| Home Loan Amount | 40,00,000 |
| |
| Tenure | 20 years |
| |
| ITEMS | You | Your Partner | |
| Portion of loan | 20,00,000 | 20,00,000 | |
| EMI | 2,40,000 | 2,40,000 | |
| Principal | 70,000 | 70,000 | |
| Interest | 1,70,000 | 1,70,000 | |
Assume that you both have about 50,000 claimable under 80C in the form of PF and insurance. Now, let's see how much you can claim under tax rebate.
Each one of you can claim 1,50,000 on interest under section 24(b). This means you can claim 3,00,000 on interest collectively. Similarly, since you already have 50,000 under 80C, you both individually can claim another 50,000 from your principal payment which is 70,000 in your case. This means you can further claim 1,00,000 on principal under 80C.
-----------------------------------------------------------------
Also, know how to buy mutual funds online:
Invest in DSP BlackRock Mutual Funds Online
Invest in Reliance Mutual Funds Online
Invest in HDFC Mutual Funds Online
Invest in Sundaram Mutual Funds Online
Invest in Birla Sunlife Mutual Funds Online
Invest in IDFC Mutual Funds Online
Invest in UTI Mutual Funds Online
Invest in SBI Mutual Funds Online
Invest in L&T Mutual Funds Online
Invest in Edelweiss Mutual Funds Online
