Tax Planning with Home Loan

A house is one of the biggest investments and most of us might already know that our home loans are eligible for tax benefits under the Income Tax Act. Today, Housing loans have become an attractive proposition to save taxes. For salaried individuals Public Provident Fund, Life Insurance Premium, Equity Linked Savings Schemes (ELSS) etc are eligible for Section 80C deductions. However, individuals whose gross total income exceeds Rs 250,000 pa, deductions under Section 80C may not be sufficient to reduce the overall tax liability. In such cases they need to think beyond Section 80C. Home Loan is one of the attractive propositions to save taxes.

Tax benefits for home loans

The Income Tax Act, 1961 provides tax benefits for assessees that have home loans. The bank gives a detailed worksheet of the loan calculation and of the bifurcation of the EMIs paid by the borrowers. Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. The principal repayment on a home loan is eligible for a deduction of up to Rs 1,00,000 per annum and the interest paid is eligible for a deduction of up to Rs 1,50,000 per year.

Joint home loan

Joint home loan is an option that might prove fruitful for married couples. By doing this, the income from house property can be divided between the two of them according to their share of ownership in the house property and the amounts paid. The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximized. Both can separately claim a deduction for the amount of interest and principal of the home loan separately. To ensure that the tax benefit is optimally utilized, an individual can consider opting for a joint loan with his spouse, parent or sibling.

House Rent Allowance

Most of the salaried people get an allowance for taking care of the rent that they pay for their home. This is called House Rent Allowance or HRA. Any salaried employees drawing house rent allowance up to Rs.3000 per month will be exempted from giving rent receipt to DDO. Since housing is one of the fundamental needs, the government treats it sympathetically, and gives various tax breaks towards it. An individual can claim an HRA exemption only if the following three conditions are satisfied:

• An HRA allowance is received as part of the salary package.
• If one is staying in a rented accommodation and paying rent for it.
• The rent exceeds 10% of the salary.

Claiming Home loan tax benefits and HRA together

If you have a house in one city for which you have taken a home loan and you reside in another city due to work or similar reasons, then you are eligible to avail all the benefits. There may be a situation that you have got the house for which you had taken the home loan but instead of using it yourself, you have rented it out and you continue to reside on a rented house then you can claim all the tax benefits and the HRA. But it should be noted that the rent received by you is considered as your taxable income.

Having any query regarding Home Loan? Let our Expert help you. Click here.

House Rent Allowance (HRA) is a component of your salary package and is given by an employer to an employee for the sole purpose of meeting the cost of renting a home. It should be understood that deduction on home loan and HRA benefits are two different issues under the Income Tax Act. The tax benefits on home loan and HRA can be claimed together by an individual if he fulfills the eligibility criteria on deductions relating to home loan and HRA. If you are paying rent to your parents and you are getting the receipt for the same, you can claim a deduction. But if you are paying rent to your spouse and you are getting the receipt for the same, you cannot claim a deduction.

According to the Income Tax Act, only owners or co-owners are eligible for tax benefits on home loan repayments. Home loans are entitled for Tax benefits under Section 80C (Tax benefit on principal repayment) and Section 24 (Tax benefit on interest payment) of Income Tax Act. However HRA and home loan provisions are two different issues as far as the Income Tax Act is concerned. The tax benefits on home loan and HRA can be claimed together by an individual if he fulfills the eligibility criteria on deductions relating to home loan and HRA. Good tax planning comprises tax compliance and availing proper tax benefits, coupled with proper analysis of the financial implications of a decision. Be a smart investor to minimize your tax liability and attain your long-term goals.