No matter how much your income is, if you want to save your money, then a proper financial planning is a must. If you are a salaried person, you must have some plans to save your income tax every year. There are so many tax saving investments that can help you reduce the tax burden on you, and among them, availing of a home loan can be the best income tax saving option for you.
Taking a home loan will not only save your tax but will also help you fulfill your dream of buying or building your own house. Meanwhile, to encourage its citizens, the central government is offering home loan tax benefits by which one can easily purchase a home and save money on tax.
In 2022 budge, the Centre brought no major changes in the deductions under home loans, but the allocation of Rs 48,000 crore fund to the Pradhan Mantri Awas Yojana (PMAY) was only major news.
Let's take a look at how you can make the most of these benefits:
Tax Benefits on Home Loan (FY 2022-23) under the provisions of the Income Tax Act, 1961:
Section Under Income Tax Act, 1961 | Maximum Deduction |
Section 80C | Rs.1.5 lakh/year |
Section 24 | Rs.2 lakh/ year |
Section 80EE | Rs.50,000 / Year |
Income Tax benefits on a home loan:
As per the instructions by central government, you can enjoy tax benefits on home loans under the provisions of the Income Tax Act, 1961. Besides, you must be aware that there are two components on the EMI payments, one is principal repayment and the other one is interest payment.
Deductions of Principal repayment under section 80C:
Under Section 80C, you can claim up to Rs.1.5 lakh from taxable income on principal repayment for both self-occupied and let-out properties every year.
Under this section, you also can claim a deduction for stamp duty and registration charges of your house. But the overall limit will be Rs 1.5 lakh. And if you want to avail of the benefits under this section, you cannot sell the property or house within five years of possession.
Interest deductions under Section 24:
For buying or constructing a new house which must be completed within five years from the financial year end in which the loan was availed.
Under Section 24, you are eligible for a tax benefit of up to 2 lakhs for both self-occupied and let-out home.
Added deduction under Section 80EE:
Additional deduction under Section 80EEA:
According to the Union Budget 2022 presented by Finance Minister Nirmala Sitharaman, from 1st April 2022, first time home buyers won't be able to claim income tax benefit on up to Rs 1.50 lakh home loan interest payment under Section 80EEA of the Income Tax Act.
However, the first time home buyers whose property value is less than Rs 45 lakh and have got home loan sanction letter before 1st April 2022, can still claim income tax benefit under Section 80EEA. And before claiming the tax return you should keep the following points in mind:
Point to note, if you want to enjoy tax benefits under the 80EEA section, you can't claim deduction under section 80EE.
Deduction for Joint Home Loan:
A great scope to save your tax if you avail a home loan jointly. Each co-borrower can claim up to 2 lakhs each on the interest and Rs1.5 lakhs each on the principal amount paid.
Calculate tax benefits on a Home Loan
One can use an online calculator to calculate the exact amount to be paid after all the eligible tax deductions. You can just simply enter all the required information and get the complete tabulation. The following are the details you will need in most cases:
Well, a home loan is a big liability, but it also offers substantial tax breaks. One has to understand these carefully so that they can make the best of the situation.
(DISCLAIMER: These are general awareness tips. Before making your own financial planning, you are advised to consult your personal financial advisor.)
Personal finance's basic principles suggest that individuals should start by being introspective. Instead of looking for high-paying investments, one should first think about financial goals. Your financial goals will clearly outline your objectives and help you plan your journey in a better way. You can decide where to invest, how to invest, and what your expectations are. A clear financial goal or smart financial goal will help you create a solid financial plan, something which will be easier to execute. Here are some ways to create a SMART financial goal.
Definite: Individuals must have a clear financial goal in their minds. For example, buying a house is not a clear goal. It makes sense if you can say that you are arranging down payment to buy a 2BHK home in Bangalore suburbs. Specific goals will ensure there is an emotional connection with financial goals, and these goals are more likely to be met.
Measurable: It should be able to give a value in money, along with other factors. This helps an individual understand his/her goals. The above example would show that s/he would eventually buy a home worth Rs 80 lakh. A 20% down payment would work out to Rs 16 lakh. You can adjust your goals based on how much money you have saved and how the prices of the financial goals have changed. If you have a goal to raise Rs 16 lakh, but the market prices rise above your expectations, the money value should be included in your financial plan.
Obtainable: Financial goals must be realistic. Sometimes, the goals may not be achievable in the near future. One can use his/her time to make these goals achievable. If some funds are allocated to high-return risk assets, it may be possible to achieve goals that seem impossible for people with low-risk profiles. In the above example, a person with a monthly income of Rs 1 lakh and a monthly savings of Rs 30,000 appears to have a difficult goal to reach the goal of raising the required amount of money before the end of the financial year. If the individual works for a longer period of time, however, his goal will be possible. You should invest approximately Rs 20,000 each month if you want to build a wealth of Rs 16 lakh over five years. In the context above, these numbers are achievable.
Realistic: It is important to be realistic about your financial goals. A person earning Rs 1 lakh per month can build a mansion in Bangalore. However, it is impossible to do so in the context of high property costs and low income. In such situations, only a miracle can save the day. It is really not a concern if you keep alive your goal of purchasing a 2BHK. But if you try to accomplish it in a short time, along with other goals like going on vacation abroad or arranging down payments for a luxury sport utility vehicle, it may become impossible.
(DISCLAIMER: The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)
More From The Author: Is it a good idea to own a credit card? Find out
HOME LOAN
Once when I had been to Bengaluru, I visited my niece’s house. While I was finishing my cup of filter coffee, her husband shared the idea of buying a flat in Bengaluru. He added that every year the house rent was going up and in last 4 years they have changed their house twice. “That’s great,” I supported his idea and added, selecting the location based on facilities and conveniences are important but more than that what is to be looked at is how you finance.
“Mama! Why don’t you give some free advice,” Neha, my niece smiled and joined the conversation. “Nothing is free my dear. You can offer me another cup of coffee without milk and sugar”, I set my terms and started - Choice of the flat is yours but let me focus on financing part.
MARGIN
“You must be ready to put some money on the table, i.e. MARGIN. If you have seen a property worth Rs. 100 lakh (and lender has agreed to finance) then in most cases you have to pay a margin of 20% i.e., Rs 20 lakh upfront (this may vary). However, you should first work out on two “How Much”- “How Much you should borrow” and “How much EMI you can pay to repay the loan”
(EMI or equated monthly installments are monthly payments one has to make to the lender, and that includes both interest and principal. The amount will depend on how much loan you take, tenor of the loan and interest rate.)
How Much Home Loan & How Much EMI
“Though there is nothing carved in stone, generally one should not borrow more than 5 times of their take-home annual income. But that’s not everything. You should also watch that your EMI obligation does not go beyond 40-50% of you monthly take home (though this is not very conservative)”.
Fixed rate Interest
I continued. “Suppose your annual take home salary is Rs 24 lakh , you may borrow up to Rs 1.20 crore. If your monthly take home is Rs 2 lakh, your total EMI obligation can be 50% or Rs 1 lakh. But you already have two cars. Right?” They nodded. “Say your existing EMI obligation on those is Rs 20000, which means for home loan you can pay only Rs 80,000 per month and that will be borrowing to the limit.”
So let us do some calculation:
Joint Ownership
Joint Ownership indicates that the property is jointly owned by two individuals. In most cases, these individuals are spouses. In the case of joint ownership, the financial responsibility of loan repayment is equal for both applicants.
Floating Interest rate: A floating interest rate is one type of interest rate offered by lenders where the rate of interest being charged is sensitive to market conditions. If you choose a floating interest rate for your home loan repayment, then your interest rate can both increase and decrease at specific intervals, along with the market conditions. These loans are linked to the lender’s benchmark rate. If there is a change in the benchmark rate, the interest rate on the loan also changes proportionately.
The interest rate on such loans is reset at specified intervals. It could be calendar periods like every quarter or half of a financial year or it could be unique. It is usually the tenure of the loan that gets re-adjusted to account for the changed interest rate. If the rate increases, your remaining loan tenure would be extended and vice-versa. This is done to avoid frequent revisions to your EMI which could impact your cash flow.
You should opt for a floating rate home loan in the following circumstances:
If you are expecting interest rates in general to fall over time, opting for a floating rate loan in such a scenario will result in the interest rate applicable to your loan falling too, thereby reducing the cost of your loan.
You need not worry too much about making a wrong decision regarding your housing loan. Remember, you also have the option to switch between fixed rates and floating rate housing loan at any point in time; lenders would usually levy a nominal fee for this facility.
Pre EMI
Sometimes lenders disburse loans in installments, depending on the stages of completion of the housing project. Pending final disbursement, you may be required to pay interest only on the portion of the loan disbursed. This interest is called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement upto the date of commencement of EMI.
Foreclosure
If you can pay off your loan amount in full before the end of your tenor, then it is called foreclosure. In foreclosure, you will pay the remaining loan amount in a single go and not in EMIs. Generally if you are paying from your own savings, no penal charges will be applicable. However if you want to transfer the loan to anew lender, there may be some charges.
Offer Letter and The Fine Prints
After you select the house and lender approves the loan, the lender will issue an offer letter/sanction letter. You need to go through that diligently as there will be small points like processing charges, loan amount, disbursing terms, interest rate, fixed or floating, if floating the benchmark and resetting period, in case of delayed payment the penalty, terms for foreclosure etc. Once you sign the legal document, the terms and conditions will be binding on you.
The Final Reminder: Once you occupy you may host a house warming party but don’t forget that the house becomes yours only when you pay the loan.
By Binodgopal Mukherjee
(DISCLAIMER: The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)
A Magicbricks report showed that India has witnessed a 42 per cent surge in demand for balance transfers (BT).
There has also been a 20 per cent demand rise for loan against property (LAP) in during the period under review, showed 'Magicbricks Home Loans Consumer Study - H1 2021'.
"The soaring demand has been triggered largely by the fact that the Reserve Bank of India (RBI) has kept the repo rate unchanged at a constant 4 per cent, allowing many banks to offer interest rates less than 7 per cent for home loans. This has also been a key driver in augmenting the demand for home buying," it said.
Magicbricks CEO Sudhir Pai said: "The rising demand for home loans is in line with the increasing demand for residential real estate across key markets of India. Several initiatives by the government, such as keeping the repo rate constant and reduced stamp duty rates, are steps in the right direction."
These measures have been instrumental in boosting the overall consumer sentiment, making almost 50 per cent of the borrowers opt for tenures less than 15 years, he said, adding that with factors like low interest rates, stable prices, and attractive payment plans, they are hopeful that the pent-up demand would soon translate into sales.
In a statement, the bank said, it has reduced home loan interest rates to 8.30 per cent.
Similarly, automobile loan is now offered at a starting interest rate of 8.70 per cent per annum compared to earlier 8.75 per cent.
With this reduction, SBI's offering in home loan is the lowest in the market. The new rates will be effective from November 01, the SBI claimed.
The effective interest rate for all eligible salaried customers will be 8.30 per cent per annum for loans upto Rs 30 lakh.
Rates have been reduced by five bps in all the brackets.
Over and above of 8.30 per cent rate, an eligible home loan customer can also avail of an interest subsidy of Rs 2.67 lakh under the Pradhan Mantri Awas Yojana scheme.
For car loan customers, the loan amount ranges from 8.70 per cent per annum to 9.20 per cent per annum compared to earlier range of 8.75 per cent to 9.25 per cent.
The exact rate depends on the amount of loan and the credit score of the individual.
SBI reduced its MCLR by 5 basis points (0.05 per cent) across all tenors with the one-year MCLR coming down from 8.55 per cent per annum to 8.50 per cent per annum.
"As a result, interest rates on all loans linked to MCLR stand reduced by 5 bps (basis points) with effect from 10th April 2019," the bank said in a statement.
"Also, SBI makes its housing loans more affordable by reducing the interest rate by 10 bps on loans up to Rs 30 lakh. Now the applicable interest rate for such housing loans below Rs 30 lakh will range from 8.60 per cent p.a. to 8.90 per cent p.a."
Besides SBI, Indian Overseas Bank also reduced its interest rate on loans (MCLR) by 5 basis points for tenures of one-year and above from April 10.
"Taking a cue from the latest policy measures...and to support growth of the economy, Indian Overseas Bank, Chennai-based public sector bank, reduced its interest rate on loans (MCLR) by 5 basis points in one year and above tenors wef 10.04.2019," the bank said in a statement.
"Hence, various loans like Housing Loan, Vehicle Loan etc., will become cheaper", it added.
Last week, Bank of Maharashtra reviewed and reduced its MCLR with effect from April 7, 2019.
Muted growth and subdued inflation prompted the RBI, last week, to lower its key lending rate for commercial banks by 25 bps to 6 per cent.
"On the basis of an assessment of the current and evolving macroeconomic situation, the MPC (Monetary Policy Committee) decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6 per cent from 6.25 per cent with immediate effect," the RBI said.
"Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the bank rate to 6.25 per cent," it added.
A day after the RBI cut its repo rate by 25 basis points to 6%, the SBI has decided to cut the benchmark lending rates.
SBI slashed the interest rate on housing loans of up to Rs 30 lakh by 10 basis points. Similarly, interest rate for SBI housing loans below Rs 30 lakh has been revised to 8.60%-8.90%, from existing rates of 8.70%-9%.
SBI consumers taking overdraft or short-term loans will have the last laugh as the interest rate will be cut by 25 basis points. The SBI has announced to link savings bank accounts with deposits above Rs 1 lakh and short term loans to the RBI's repo rate from May 1. The move will also ensure an immediate transmission of changes to the savings account.
Apart from this, consumers having saving account above Rs 1 lakh balance will get interest rate of 3.25% from May 1.
The lender has also reduced interest rate on cash credit account (CC) and overdraft (OD) customers with limits above Rs 1 lakh, after the RBI reduced the repo rate by 25 basis points Thursday.
"We will introduce repo-linked home loans from July 1," SBI said in a late evening statement.
The monetary policy committee had unanimously decided to reduced repo rate by 25 basis points to 5.75 percent in the second bi-monthly policy Thursday, taking it down to a nine- year low, citing sagging growth and to cushion the rising headwinds to the economy.
It was the third consecutive repo rate cut by RBI, with cumulative reduction of 75 basis points in 2019, so far.
"The benefit of reduction in the repo rate by 25 bps has been passed in its entirety to our CC/OD customers (limits above Rs 1 lakh), with effect from July 1," SBI said.
The effective repo-linked lending rate (RLLR) for CC/ OD customers is 8 percent now, it said, while for savings deposits above Rs 1 lakh the new rate would be 3 percent.
In March, the bank had linked all CC accounts and ODs with limits above Rs 1 lakh to the repo rate plus a spread of 2.25 percent. For above Rs 1 lakh, it had set its savings deposit rates to 2.75 percent below the repo rate.
Two days back Reserve Bank of India Governor Shaktikanta Das had said that he expects faster transmission of the three successive repo rate cuts.
In June, the RBI's Monetary Policy Committee (MPC) had reduced repo rate by 25 basis points to 5.75 per cent. The RBI had also reduced the repo rate in February and April this year.
The SBI is providing home loans at the interest rates linked to the repo rate. This means any changes in the key interest rate by the central bank would be passed to customers.