Your home loan interest provides you with tax benefits – read on to know more.
Did you know that taking a home loan not only helps you fulfil your desire to buy a home, but also helps you save taxes?
As per prevalent Income Tax Laws (as outlined by the Income Tax Act, 1961) you can get tax benefits under Sec 80C on the home loan. The deduction can be claimed against the home loan interest.Do find out the interest payable using a home loans calculator.
However, there are riders on this tax saving feature ingrained in the home loan.
What is the income on your property?
‘Income from house property’ decides the final value of the house in a fiscal year against certain parameters. This is how it is calculated:
* Annual value (Taken as ‘zero’ if you are occupying the house you purchased) or the rental income (in case the house is purchased on loan and rented out)
* Annual value minus Property tax and other cess paid to the municipality = Net value
* Net value minus Standard Deduction (taken as 30% of net value) = Intermediate value
* Intermediate value minus Deduction for home loan interest = Income on the property
Claiming rebates on interest –
1) The self-occupied house
As per the chart shown above, consider the Gross Value. In case of a self-occupied property, the gross value of the property is considered ‘zero’. Hence, only the loan interest can be considered for tax computation. However, this value is not directly proportional to the home loan rate of interest when computing the tax deduction. On the contrary, the interest on the home loan is considered as a loss from the income on the house. But it is considered to be balanced out from your annual income from job or business. Consequently, the taxable component is reduced. The IT Act, 1961, provides up to Rs 2 lakh deduction on home loan interest for this category of properties, i.e. self-occupied.
2) The rented house
You may purchase a house using a home loan, but instead of living in it you may rent it out. Since you have a monthly rental income, the Gross Value of the house is taken to be the total rent collected in a financial year. After claiming standard deduction and municipal taxes, you pay tax on the remainder. Do note that taxes are payable on all the properties owned and rented by you.
As per new tax modifications for the year 2017-2018, the Government has mandated a maximum loss from rented property at Rs 2 lakh. Additional loss to income from property is carried forward to the next financial year, to be claimed over a period of eight years.
3) Under construction house
You can claim an interest deduction on under construction properties only when the construction is finished and you get possession of the house. There is no rebate if loan is taken and construction is incomplete within five years of taking the loan.