Money talk: Learn to save on tax from Home Loan

As we approach the end of the financial year, a many people start worrying about their tax planning and ways to save some tax. Some people plan for their tax over the year, but the number of people who wake up only in the last quarter, or last month even, is still substantially high.
Home loans play a significant role in reducing tax liabilities of a lot of people. Let us take at some of the finer points that everyone needs to know before taking a home loan to save on tax.

Tax benefits from home loans can be intrinsically divided into two sub-sections. One is the repayment of the principal loan amount and the other is the repayment of the interest on the home loan.

Tax benefits on home loans are governed by different sections of the Income-Tax Act. The amount paid as repayment of the principal is allowed for tax deduction under Section 80C, while the interest paid on the home loan comes under Section 24.

Tax benefit on prinicpal amount
The maximum deduction allowed towards the principal component is Rs 1 lakh. A thing to note here is that the total deduction includes all deductions such as funds invested in PPF, tax saving FDs, equity-linked savings scheme and other financial instruments along with the home loan repayment of the principal amount.

Tax benefit on interest
The total amount paid by you towards interest on the principal loan amount is allowed for tax deduction under Section 24. The maximum limit for tax deduction under the Section is limited to Rs 1.5 lakh. If the property is self-occupied, the deduction is allowed for only one such property. Another important point to note is that if the property is not constructed or acquired within three years of taking the home loan, the interest benefit reduces to Rs 30,000.

For example, suppose your taxable income for the current financial year comes to Rs 4 lakh.
If the principal repayment for the same year is Rs 1.1 lakh and interest payable for the year is Rs 1.6 lakh, the total deduction allowed as per Section 80C and Section 24 would be a sum total of Rs 1.5 lakh towards interest payable and Rs 1 lakh for principal repayment of the loan equaling to Rs 2.5 lakh. Thus, your taxable income will reduce to Rs 1.5 lakh (Rs 5.5 lakh to Rs 2.5 lakh)

Important Points While Taking Home loans to save on tax

• A Loan is often described by financial experts as a dreaded four-letter word that everyone wants to avoid. There are ways to use loans, especially home loans, in a prudent manner so that it can offer some rebate in tax. While a lot of people take home loans because they need the money to buy a house, a significant number of people take home loans despite being financially sound, for tax saving purposes. Here are some points that you must keep in mind before taking home loans.
• Joint ownership: You can include your spouse as a joint borrower for tax benefits. Joint applicants, who are joint owners of the house, will be eligible for tax benefits as per their share in the home loan. Both partners can, therefore, claim benefits up to the maximum limit.
• Tax benefit on home loan and HRA: Many people work away from their homes and end up staying in a rented apartment. If you have brought a property through a home loan in one city and you are staying in a rented accommodation in another city, you are entitled to both home loan benefits and HRA