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Save More than Tax with home loan

Home Loan

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Home Loan article in Advisorkhoj - Save More than Tax with home loan
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Buying a home which you and your family can proudly call as your own is a life-time experience. It requires a lot of planning by family members about the exact necessities in a home and search for prospective homes and builders etc. Post these; you require finance to buy your dream home. This financing is popularly known as home loan.

What is home loan

– Home loan is a secured loan offered by a housing finance company or bank against the security of your house. Home Loan is offered to individuals who wish to purchase or construct a house. The property is mortgaged to the lender (housing finance company or bank) as a security till the loan is repaid along with interest. Normally, the loan is repaid through equal monthly instalments (EMIs).

What is the maximum amount that can be borrowed

– The amount of loan that can be borrowed typically depends on the repaying capacity of the customer, his income level (to ascertain how much EMI he can pay) and his credit score. Generally the maximum loan offered is up to 90% of the property cost provided rest of the conditions are fulfilled.

What are the types of home loan rates

– The home loan interest rates for home loans are of two types - fixed rate or floating rate. Some lenders may offer partly fixed and/ or partly floating rate, depending on the needs of the borrower.

– The fixed home loan rates comes at a pre-specified interest rate for a fixed period, after which it is repayable at a floating rate

– In the case of a floating rate loan, the rate can vary throughout the loan tenure as it is tied to a reference interest rate which changes based on economic compulsions.

What are the tax benefits on home loan

– There are various Income Tax benefits on a home loan and can be classified broadly into three parts –

  1. Rs. 200,000 deduction on interest paid for self-occupied property can be claimed under Section 24 of the Income Tax Act 1961.

  2. Rs 150,000 deduction on principal repayment can be claimed for a property which is self-occupied under Section 80C of the Income Tax Act 1961. The total deduction claimed under Section 80C is Rs 150,000 which also includes investments in insurance premiums, PPF deposits, tax saving fixed deposits and ELSS mutual funds etc.

  3. Another Rs. 50,000 tax benefit can be claimed under section 80EE as “interest on home loan” provided the home loan has been availed from FY 2016-17 onwards, the value of the house is less than Rs 50 Lakhs, the home loan amount is less than Rs 35 Lakhs and on the date of loan sanction the borrower should not own any property. This deduction is over and above the Rs 2 Lakh limit under Section 24 of the Income Tax Act.

When we talk about home loan we can think of only saving taxes. But there is more to it than saving taxes only.

It is a good investment

– A home is a good investment as the price appreciates significantly and provides substantial return on your investments if you hold the property for long term. In fact, owing a property is much better than living in rent as the rent you pay can equal to the EMI to buy a home.

You are free to create your own space

– Your home offers tremendous freedom to create the living environment that you have always dreamt of. You can paint rooms with choice of your colors, make floors with material that you wanted, own a pet or have your own garden etc.

You build a credit history

– When you take a home loan and pay EMIs in time, it demonstrates to other lenders that you are a good borrower. This also enhances your credit score and therefore, when you need any other loans for buying a car, making improvements to your home or a personal or education loan, you get it very easily.

You build assets

– When you pay monthly EMIs, a portion goes towards reducing the amount you owe as loan, and thus it increases your asset. In a sense, paying your EMIs is a form of saving as with each instalment payment your asset amount increases. With passage of time, the value of your home increases and thus increases the asset value further.

You buy mental peace

– When you have your home, you feel safe and secured. Your family can enjoy living in the home and lead a stress free life. You are free from the tension of changing homes or increase in rent or landlord’s threat to leave the rented house.

Your home works as a retirement plan

– Owing to various reasons, you could not build a retirement corpus while working. There could also be some unforeseen expenses which you could not plan earlier. To meet these financial needs, you need not sell your home to raise the money as during your retirement years a reverse mortgage loan can convert your existing home into an alternative retirement corpus while you continue to enjoy living in it during your lifetime.

While taking a loan is always not advisable but taking a home loan is different from other loans. With a home loan, apart from enjoying tax benefits, you feel safe and secure, create your own space, build an asset and most importantly use the asset during your sunset years, if so required.

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Priyanka Chakrabarty

A literature enthusiast who loves to write. An ardent social worker who dreams of bringing about change and hopes to do so through her writing. A firm believer of the saying pen is mightier than the sword, Priyanka is an English Honours graduate. She also pursed Diploma in Wealth Management Practice from IIFP and is a certified social media expert.

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