Tax deductions are reductions in the tax obligations that we owe to the government from our gross income. There are many provisions provided by the government to avail tax deductions and reduce tax outflow from our incomes. These tax deductions, come under different heads, mostly related to some type of investment made by the taxpayer. One such deduction is provided to taxpayers on home loans. Let us briefly go over these deductions:
Section 80C: Deduction on principal repayment of a home loan
Under this section, a borrower can avail a maximum deduction of Rs. 1,50,000 in a financial year from his taxable income towards the repayment of the principal amount of a home loan. This amount includes other expenses like administrative charges (registration fees, stamp charges, etc.) or other payments towards the purchase/construction of a house.
Section 24: Deduction on interest repayment of a home loan
A borrower can avail a deduction amount equal to the actual interest paid or Rs. 2,00,000, whichever is lower in a fiscal for self-occupied property, given the house is acquired/constructed within 5 years from the date of sanction. For interest on the property that is not acquired/under-construction, the deduction is availed after acquisition/construction is done.
Section 80EE: Additional home loan deductions
An additional amount of Rs. 50,000 can be availed on interest repayment by individuals for residential property in a fiscal. This is over and above the deductions of 80C and Section 24.
Is home loan a Good Tax Saving Option
Housing finance come with a host of financial costs like down payments, EMI’s, constructions costs, renovation costs, etc. Tax benefits are offered on home loans on both principal and interest repayment every year. However, the financial liability of an asset as expensive as a house needs to be weighed with the benefits before any decision is made.
If the primary purpose of buying a house is for living, then it is advisable to take a home loan for one of the above-mentioned tax benefits. This would help fulfil your dream of owning a house, with added monetary incentives. However, if the purpose of taking a home loan is solely to avail tax benefits or save your gross income, then a home loan is not the best tax deduction alternative available. The financial liability is large in size, both in terms of money that is owed, and the duration that is in consideration.
There are many other investment alternatives available where you can avail tax benefits, as well as earn returns at market rates, for example, equity savings, long term infrastructure bonds, pension funds, bank FDs, etc. Other options include deductions on investments that are short term in nature: medical insurance, life insurance, education loan, house rent allowance, etc.
To sum it up, taking a housing loan for tax benefits only makes sense, if the house under consideration is for living, otherwise, it is a very large investment in respect to the benefits, which can also be availed through other alternatives. Another important consideration is to ensure that the loan is taken from a trusted financial institution as per the guidelines of the Indian Income Tax Act, to avail these benefits.
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