Here's how you can take full advantage of tax deduction on home loans
If you have given the house on rent, you can offset the rental income with the interest on borrowed capital
The March 31 deadline to make tax-saving investments is fast approaching. If you have borrowed a home loan, make sure that you’ve take the complete advantage of deductions available on it, before you rush to make last minute tax-saving investments. Under section 24B, interest paid up to Rs 2 lakh on home loan is eligible for home loan deduction. However, there are other provisions in the Income Tax Act, which can reduce your tax liability significantly.
Various tax deduction on home loans
Under section 80C, borrowers can claim deduction of up to Rs 1.5 lakh on the home loan principal. This deduction is over and above the Rs 2 lakh under section 24B. To avail this deduction, it’s important to have the possession of the property. Those, who are waiting for the possession of the house, must get the property registered in their name before 31 March, if they want to claim deduction in the current fiscal year. Also, if you avail this tax break, you won’t be allowed to sell the property for five years.
Deduction on expenses incurred on stamp duty during the registry, can also be claimed under Section 80C.
If it is your first house and is in the affordable housing category i.e. the cost of house is less than Rs 45 lakh, you can get additional rebate of Rs 1.5 lakh on the interest as per Section 80EEA.
If you have given the house on rent, you can offset the rental income with the interest on borrowed capital. To put it in perspective- if your home loan interest is Rs 5 lakh and you have Rs 1 lakh as rental income, your effective home loan interest will be reduced to Rs 4 lakh. So, from the 4 lakh interest, you can claim deduction of Rs 2 lakh as per section 24B. The balance interest can be carried forward and deduction can be claimed over the next eight years. This is on the assumption that the interest will keep reducing and the rental income will keep increasing.
Sudhir Kaushik of Taxsapnner.com suggests not to prepay home loan. Instead, borrowers can keep the tenure longer to maximize tax benefit. Longer tenure also reduces the EMI and offers more cash in hand to the borrowers that can be invested mutual funds. For instance, net interest cost of home loan will come down to 5-6% whereas you can get 12-15% on mutual funds. Therefore, following a systematic approach to invest in mutual fund instead of prepayment or higher EMI is more beneficial.