| The home loan industry has been abuzz with activity. No other loan sector has witnessed such a phenomenal growth in the recent past. A booming real estate market, intense competition amongst the home loan lenders and higher disposable incomes of individuals has all led to a splurge in the home loan segment. However, factors such as globally rising interest rates, domestic inflation and a liquidity crunch have resulted in the hardening of interest rates. This has led home loan lenders to increase their lending rates by 1-2 per cent
TAX BENEFITS ON HOME LOANS
A home loan is repaid in the form of Equated Monthly Instalments (EMIs). This is a fixed amount payable each month to the lender. The EMI is made up of a portion of repayment of principal and payment of interest due. Both these components have tax benefits associated with them. Under Section 80 C of the Income Tax Act 1961, an amount of up to Rs 1 lakh can be claimed as deduction on the ‘principal’ portion of the total EMIs paid in a financial year. Under Section 24, a tax deduction of up to Rs 1.5 lakh is allowed per financial year on the interest paid on a home loan.
TAX HELPS REDUCE COST OF HOME LOAN
If you factor-in both these tax benefits, then the cost of availing a home loan even in today’s interest rate regime, is not expensive. Here is an example for clarification.
Let’s assume that you have taken a home loan for Rs 8 lakh, for a term of 10 years at an interest rate of 10 per cent per annum on which the total EMI payable in the first year is Rs 1 lakh. This Rs 1 lakh constitutes both, the interest component and the principal repayment component.
The interest component is Rs 80,000 (interest rate of 10 per cent x the loan amount of Rs 8 lakh) and the balance is the principal portion i.e. Rs 20,000. Both these amounts fall below the ceiling of the tax benefit available and are reduced from your taxable income. Therefore, the tax that you save assuming that you fall in the highest tax bracket of 33.66 per cent (30 per cent tax + 10 per cent surcharge + 2 per cent education cess) would be Rs 33,660 (tax rate of 33.66 per cent x Rs 1 lakh). In other words, the cost of your loan is Rs 46,340 (Rs 80,000 interest paid – Rs 33,660 tax saved) and the effective cost of your loan in the first year is 5.79 per cent (Rs 46,340 / Rs 8 lakh x 100). Clearly, the tax savings can substantially bring down the cost of a home loan.
IN CONCLUSION
Do not dismiss a home loan simply because the interest rates are showing an upward movement. Evaluate your options by understanding the tax implications and the actual cost of borrowing. The tremendous joy that you experience when you own a home can truly be enhanced, if the purchase of the home has been wisely planned. |
