So, you identified the dream home and the next step is to get your home funded. Your bank or financier will fund you up to 85-90% of the home value. What you need to understand is that taking a home loan not only comes at a lower interest cost but also entails a series of tax benefits for you. Understanding tax benefits on home loans lies at the core of buying a home. You are actually hitting 2 birds with one stone. Let us understand the home loan tax benefits 2017-18 fiscal through our very simple and illustrative home loan benefit calculator.
Tax benefits on Interest on home loan..
When you take a home loan, there will be a monthly EMI (equated monthly instalment) that has to be paid. This EMI has an interest component and a principal component. Normally, in the initial years of the home loan, the interest component will be higher while in the later years, the principal component will be higher. Every year, the Income Tax Act offers you tax deduction to the tune of Rs.200,000 per year on the interest component of the home loan under Section 24 of the Income Tax Act. This is the limit in case of self-occupied property. In case the property is rented out, then there is no upper limit to claiming interest deduction under Section 24. There is another point to understand with respect to Home loan tax benefit 2017-18. If the loan is taken jointly by you and your spouse, then each of you can show the deduction of Rs.2 lakh as interest component from your total income each year. Of course, the total deduction each year will be restricted by the actual interest component paid.
Tax benefits on the principal component of Home Loan..
There is a separate tax benefit on the principal component of your home loan EMI. We have already seen in the previous paragraph that the principal component keeps going up as the repayment period progresses. Deduction for the home loan principal component is available under Section 80C of the Income Tax Act. The Section 80C offers an overall limit of Rs.1.50 lakhs deductions each year from the total income. However, the principal component of the home loan EMI will be only one of the components and Section 80C also includes other products like insurance premiums, contribution to provident fund, ELSS investments, tuition fees paid, long term bank FDs, ULIPs etc. All these products put together, including principal component of home loan, will have an outer limit of Rs.1.50 lakhs per year.
There are a couple of interesting things to remember when it comes to claiming deduction for principal component. During the year in which you bought the house, the stamp duty paid and the registration charges can also be claimed as a deduction under Section 80C. However, this benefit will only be available for the year in which the duty was paid and not for subsequent years. Secondly, the home should be held by you for at least a period of 5 years. If you sell the house before 5 years, you forfeit the benefits of Section 80C claimed. All these benefits will be treated as income in the year in which the house is sold, in case it is sold before 5 years.
Some additional benefits to understand..
While understanding tax benefits on home loan, there are some miscellaneous issues to understand here. There is a special deduction that is offered for first-time home buyers under Section 80EE of the Income Tax Act. The condition is that the amount of the loan should be less than Rs.35 lakhs and this provision is meant to encourage home ownership among the middle classes. This is only available for loans sanctioned within a specified date range and the individual should not own any other property on that date. This benefit is limited only to the interest component and not to the principal component.
A home loan is not just a smart way to finance your home but also a smart tax saving tool. The above home loan tax benefit calculator will give you a quick idea in understanding tax benefits of home loans.