How Housing Loan helps you save tax?

Chennai Super Kings (CSK) won the Indian Premier League last month in a great fashion and this win was indeed special as it came after 7 long years. Aditya and Rakesh had been having a great time watching the weekend IPL matches together. However, this Sunday, it was a bit different. Rakesh seemed in a bit of mood while they were having tea together.

Rakesh was always a happy and smiling chap and Aditya too sensed something wrong when he saw Rakesh like that.

“What happened, Rakesh? You seem a bit upset.” Aditya was concerned.

“Nothing really. Just that my landlord has asked me to vacate the house in a month as he is planning to sell. He is selling off the property as he is going to Australia to stay with his son. He has even offered me to buy that flat for Rs. 50 lakhs, but I don’t have enough savings. I am just worried about finding a new rented house.” Rakesh and Aditya were friends for a long time and Rakesh was also comfortable sharing his life with him.

“Just Rs. 50 lakhs? It’s a great steal at this rate, Rakesh. The market value of this flat is at least Rs. 70 lakhs. Just go for it. And as regards funding the purchase is concerned, go for a housing loan.” Aditya immediately jumped off the seat.

“And you know what, this housing loan will help you save taxes as well.” Aditya further added.

“Oh really? How housing loan lowers my tax burden?” Seeing some tax advantage, Rakesh was now seriously considering the option to buy the flat after taking a housing loan.

“With a view to encouraging people to have their own house properties, Govt. provides tax deductions on the interest on housing loan as well as the principal repayment of the loan.” The financial advisor within Aditya was now active.

“That’s nice. How much tax savings can be expected?” It seemed like the idea had really pleased Rakesh and he was in no mood now to leave the offer to buy the flat.

“As per the present tax laws, you can save tax against the interest amount that you pay on such a property. Importantly, even if the property is self-occupied, you can avail of this benefit. Since you will stay in the house, interest amount of up to Rs. 2 lakhs can be deducted from your taxable income and hence you can save up to Rs. 62,400 of tax. In fact, if you have a co-borrower on the home loan, he or she can also additionally claim the deduction of up to Rs 2 lakhs from his or her taxable income.” Aditya was using his financial acumen to get him more interested.

“And the tax benefit not only stops with this. The principal amount of loan repaid during the year also gets deducted from your income as per Section 80C of the Income Tax Act, 1961 once you take the possession of the house. However, this benefit is part of the overall tax saving options such as ULIPs, PPF, EPF etc, under that section and the ceiling thereon is Rs. 1.50 lakhs for all the tax savers in aggregate. In fact, in the first year of the loan, you can also claim your expenses towards stamp duty and registration of the house under Sec. 80c.” Aditya added to his earlier statement.

“Any saving is indeed a good saving. While I was worried about finding a new flat on rent, you have given me a nice reason to think for something better.” Rakesh was much excited now.

“So, when are you inviting me for a tea in your own flat?” Aditya quickly stole the moment and it ended up with smiles on both the faces.

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