Buy a flat to avail fiscal advantages

The income tax deductions on home loan repayment make it a win-win situation and facilitate ownership at an earlier stage

Home owners can avail multiple tax benefits that can not only reduce their tax outgo but also help in managing their cash flows better. Following are some income tax benefits deductions that home owners can claim:

1. Deduction on interest component in the EMI: If the home owner is paying EMIs for a home loan that he took to buy a house, the interest component in the EMI can be claimed as deduction. This is, however, subject to fulfilling the criteria of both an owner and a co-borrower (in the loan). This deduction can be claimed starting the year in which the construction of the house is completed and there is a cap of Rs 2 lakh every year for a house that he uses for his residence. If the house is rented, the entire interest for the year can be claimed as deduction.

As the interest payments for the year result in a loss under the head 'income from house property', this loss can be adjusted (in the same year) against other heads of income in the owner’s income tax return including salary. This greatly reduces owner’s total taxable income and the tax he is liable to pay.

2. Deduction on principal repayment: Home owner can claim deduction under Section 80C of the Income Tax Act on the component of EMI which goes towards principal. A maximum of Rs 1.5 lakh can be claimed as deduction under this provision.

3. Deduction on stamp duty and registration charges: Home owners are also eligible to claim deduction for payment made towards stamp duty and registration charges. This can be claimed under Section 80C once in the year in which these were paid.

4. Other benefits: A joint loan is also beneficial for home loan customers as it mean each customer can claim deduction up to Rs 1 lakh for repayment of home loan principal under the overall limit of Section 80C of the Income Tax Act. This is besides an additional deduction of up to Rs 1.5 lakh under Section 24B for interest payment once customers get possession and occupy the house.

5. Municipal taxes: A customer can show municipal taxes paid during the year as deductions from total income. A flat 30% of the annual value can also be claimed as deduction for maintenance expenses such as repairs, insurance, etc.

Prepayment considerations
Indian customers are averse to debt and often prefer to prepay their home loans. This decision, however, should be taken after considering various options as prepaying home loans may not always be the most economical option.

Lower interest rate on offer is the key factor for customers to prepay their home. However, one should not base their decision on this factor alone and should take into account the amount and tenure left for repayment, and prepayment charges.

It is always advisable to prepay home loan if the customer has spare cash as it will help in reducing the interest cost substantially by reducing the principal outstanding amount on the loan.

Prepayment of home loans however, is not the right decision if a fixed-interest loan has been taken at a rate lower than the interest rates offered on savings instruments, such as fixed deposits. One should also not prepay if there is substantial tax benefits in terms of repayment on the principal amount, under Section 80C.

Given that the interest on home loans is calculated using the reducing balance method, which is based on the outstanding amount, the decision to prepay should be based on the prevailing interest rates instead of loan tenure.

Banks charge borrowers for closing the loan account before the stipulated time. This also makes it imperative to consider the charges for prepayment of the loan as it may be advisable to complete the loan tenure if the saving on the interest is less than the prepayment penalties.

Second home
One can avail tax benefit on the second house by claiming it as self-occupied. As one can claim only one house as self-occupied the other property in this will be considered as let-out property. The notional rent on the second house will be added to owner’s income and will be taxed as per the applicable tax slab. However, the owner is allowed to deduct the interest on the home loan from the notional rent.

One also has an option to save tax by investing in spouse's name if she owns no other residential property. Home owners are also required to pay wealth tax on the second house as only one residential property is exempt from it. It is therefore advisable to give it on lease and earn income.

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