Tax Benefits of Home Loan
Before disbursal
- Processing fee: This is payable with the application and is non-refundable. Charges are between 0.5% and 1% of the loan amount.
- Legal and technical charges: Some banks levy this charge when they disburse the loan. Charges vary from bank to bank.
- Stamp duty: Many banks also recover the stamp duty paid on the registration of the loan agreement.
- Top-up charges: If you wish to take an additional loan, there is a 0.5% charge on that amount.
After disbursal
- Prepayment charge: If you prepay your loan, there is a 1-2.5% penalty. Some lenders waive this if the prepayment is up to 25% of the outstanding loan in a year.
- Duplicate statement charges: Some lenders charge 100-500 to issue a duplicate statement.
- Late payment or bounced cheques: If your EMI cheque bounces, you are charged 200-500. This is besides the charge levied by your bank. Late payment charges vary from bank to bank.
- Ending the loan – Is it feasible to prepay?
This is a perennial dilemma for home loan customers. And the short answer is, yes. The long answer is that if the interest you are paying on the home loan is higher than that being earned by your investments, you are better off foreclosing the loan.
Banks charge a prepayment penalty of 2-2.5% if the loan is being refinanced by another lender. However, if you are paying from your own funds, some banks don’t charge any penalty. It is possible to negotiate and reduce the prepayment charges.
Tax benefits for borrowers: The tax benefits available on home loans bring down the effective cost of borrowing. The repayment of principal for a home loan, for instance, is eligible for a deduction of up to 1 lakh a year under Section 80C. This is especially useful for borrowers who are paying huge EMIs and, therefore, don’t have too much to invest in other tax-saving options. You also get the deduction of the interest paid on the loan. Up to 1.5 lakh a year is deductible from the taxable income of the borrower under Section 24(b).
- Living in another city: The home loan benefits are available if the house is for self-occupation or if it’s given out on rent. However, a borrower can avail of the deduction even if he has bought a house in another city without losing out on the exemption for house rent allowance. So, if you work in Delhi but have purchased a home in Jaipur, you can claim a deduction under Section 24(b) as well as an exemption for the house rent allowance received.
- Partial disbursement: In some cases, the disbursement of the loan is linked to the stages of construction of the property. The tax treatment is different here. This portion of the interest paid prior to the completion of construction cannot be claimed as a deduction in the year in which it is paid. However, the borrower can claim deduction for the interest under Section 24(b) in five equal installments after the construction is completed. Do note that the limit on deduction in a year remains 1.5 lakh.
- More than one loan: Benefits under Section 80C and Section 24(b) can be taken for more than one home if all the properties meet the requirements. Irrespective of the number of homes, the limit of 1 lakh under Section80C and 1.5 lakh under Section 24(b) still apply. However, if the house has been given out on rent, there is no limit on the deduction of the interest paid for that loan.
- Joint home loan: Co-borrowers can separately claim tax deduction if the house is jointly owned by them. The tax benefit can be availed of in the same proportion as the ownership in the property. If the husband has paid 60% of the total amount, the tax deduction will be available in the same proportion. So if principal repaid during a year is 1 lakh, the husband can claim deduction of 60,000, and his wife, for 40,000.
- Loan from relatives also eligible for tax breaks: The tax incentives on home loans are available even if you have borrowed from your relatives or informal sources. The requirement is that the loan should have been taken for the purpose of construction, purchase, renovation and repair of the property. However, you cannot claim deduction under Section 80C for the principal repaid if the loan has not been taken from a financial institution.
- No tax benefits for buying plots: Home loan tax benefits are offered only in case of built property. There is no tax deduction if the loan is taken to buy a plot of land.
- You lose tax benefits if you sell soon: If you sell a property within three years of buying it, any gain will be treated as short-term capital gains and taxed as your income for that year. In the highest tax bracket, you could lose a big chunk of your profit to taxes. But this is not your only loss. Any tax benefit availed of by you on a home loan for the property will also be reversed. The Income Tax Act states that if the property is sold within five years from the end of the financial year during which it was bought, the tax deductions claimed will be added to the income for that particular year and taxed at the marginal rate of tax. So, keep this in mind when decide to sell your house.
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