Make your home loan the tax saver

Sri Kala

Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuiances of finance which has attained a new look over the years. Besides being a columinist, Srikala has also been closely associated with some of the prestigious book projects.

One of the primary reasons for property boom between 2002 and 2007 was the easy access to home loans. With cheaper interest rates and excellent tax benefits, home loan became an income generator than a burden for many during this era.

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A lot has changed in the last two years. The tax benefit has remained at Rs 1.5 lakh but the property prices have gone up by 2-3 times during the same period. As a result, the tax benefit on the interest component of home loan is no more the carrot it used to be, a few years ago. Still, the interest you cough up on your home loan is the single largest contributor to your tax saving and with a little bit of smart planning, you can make a better use of your home loan. Here are some tips for the same.

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Joint ownership and joint loans: It is a well-known fact that the interest component of Rs 1.5 lakh qualifies for deduction from income for self-occupied properties. With the property prices having hit the roof in the last 2-3 years, most borrowers end up paying interest which is well above such limits due to higher amount of home loans. Those with spouse, however, can a make a better use of such huge interest outgo.

If husband and wife jointly own the property and become co-applicants for the property, they can individually claim the tax benefit of Rs 1.5 lakh each. As mentioned earlier, the joint ownership of property is a necessity for the same. While most couples make it a habit to become co-applicants, few take the trouble of owning the property jointly. Not only does it provide tax relief for both and increase the tax-free income for the family, the joint ownership can also come in handy in future. Besides joint ownership, the couple also provide proof that the loan is serviced jointly with their respective incomes. For operational efficiencies of the same, consult your auditor, so that the same becomes less cumbersome at the time of filing of tax returns.

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Setting aside rental income against interest: While the tax benefit for an annual interest of of Rs 1.5 lakh on home loan is provided under Section 24 of the Income Tax Act, it is not restricted to self-occupied property alone. Those who rent out the property can enjoy the benefit by deducting the interest paid on home loans from rental income. For instance, if a borrower pays an annual interest of Rs 2 lakh on his home loan and earns a rental income of Rs 10,000 per month, his income from property would be negative and the same is reflected as loss of income from house property to the extent of Rs 80,000 (Rs 2 lakh-Rs 1.20 lakh). The amount is deducted from gross annual income and the balance would be taxed accordingly.

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Beyond interest income: Interest is not the only component of your home loan which gives tax benefit. Even the principal amount of home loan qualifies for tax deduction. Your banker will be able to provide the break-up of principal and interest component of home loan and plan your investments in tax savings accordingly. In the initial years of loan repayment, the principal component will be much lower when compared with interest component. In addition, the related expenses on property such as repairs and maintenance or annual house tax too qualify for deduction from rental income and give relief to property owners.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com.

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