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Home Loan Tax Benefits – A Mirage or Reality

Home Loan Tax Benefits is one of the key reasons to avail home loan. In other words, it is a motivational factor to buy a property on home loan. In my opinion, it is more of a perception that may or may not be true always. This perception is so deep rooted in our minds that it has become a sort of universal truth. Whenever we decide to purchase a property through Home Loan, our friends and relatives remind us about the attached Home Loan Tax Benefits. The million dollar question is Have you did financial calculations on Home Loan Tax Benefits? Based on my experience i can say that in 99.99% cases, the answer is NO.

Types of Home Loan Borrowers

There are numerous types of Home Loan Borrowers. Based on my experience, i am dedicating this post to following four types of borrowers.

1. I do agree that Home Loan Tax Benefits reduce the overall cost of borrowing. The problem arises when you avail home loan just for the sake of tax benefits attached to it. In other words, Home Loan Tax Benefits is the primary reason to avail home loan. These borrowers are over obsessed with tax savings. Normally, the people in highest income tax bracket falls under this category.

2. These borrowers can easily very prepay or close home loan due to higher income level and savings. They keep dragging home loan to continue availing Home Loan Tax Benefits. They are under a serious misconception that their income tax planning is meticulous. It may or may not be true.

3. A misconception on dual benefits of investment cum Home Loan Tax Benefits. These borrowers are the darling of builders and banks. The property is bought solely for investment purpose. In more than 95% cases, it is not a financially wise decision to buy a property for investment through a loan. I discussed it in detail in my post, Avoid Property Investment through Home Loan.

4. As i keep highlighting in my posts that a borrower should increase EMI in the proportion of the annual increase in salary. Some people do not follow this rule. The reason being, fear to lose Home Loan Tax Benefits. The increase in Salary increase the overall tax outflow. Therefore, a borrower tends to continue with a home loan for a longer period. Though it is not true always. The increase in EMI reduces the interest outflow thus reduce the overall cost of the property.

Home Loan Tax Benefits – One Side of the Story

I receive a lot of queries on Home Loan Tax Benefit Deductions. The biggest problem is that we only look at one side of the story. As i shared earlier that sometimes we are over obsessed with the Home Loan Tax Benefits. Have you every wondered at what cost you are getting these tax benefits? The cost is Home Loan Interest.

Recently i was glad to go through a query of one of my readers, his query was related to Home Loan prepayment. He did thorough calculations and concluded that Home Loan Interest outweighs the Home Loan Tax Benefits. In other words, on a net basis, the interest outflow was higher compared to the tax savings. Therefore, it makes perfect sense to prepay the home loan. He sought my inputs on the same.

The point i am trying to make is that a borrower should calculate the net benefit instead of a gross benefit. The net benefit can be calculated by deducting absolute interest outflow from the absolute tax savings. Here i would like to clarify that some borrowers make a mistake of considering tax deduction availed as net tax savings. It is not the correct interpretation.

For example, I and my wife have a self-occupied property. We both are individually claiming 1.5L and 2L tax deduction on principal and interest component of Home Loan. Our net tax savings is not 7L as perceived in most of the cases i.e. 3L for principal and 4L for interest. Net tax savings will be actual tax saved because of this deduction. Primarily, it will depend on income tax bracket. Assuming i am in 30% tax bracket and my wife is in 20% tax bracket. Considering the tax bracket is not changed even after availing tax deduction. Therefore, roughly my net tax savings will be 1.08L and my wife will save approx 72k. The household net tax savings will be 1.8L. On the contrary, the interest outflow will be much higher. As the property is self-occupied therefore we don’t mind negative tax savings as we are saving rent. The savings in rental payout or loss of HRA benefits should also be considered for net tax savings.

The net tax savings depends on multiple factors. Thus, the decision to continue with Home Loan Tax Benefits or prepay/closure of home loan will also depend on these factors. Let’s check out all these factors in detail.

Home Loan Tax Benefits – Key Factors

1. Self Occupied or Let Out Property

One of the most crucial factor that impacts the Home Loan Tax Benefits. Prima facie, a borrower/s in the highest income tax slab and the property is let out/rented can claim max Home Loan Tax Benefits. In this case, 100% interest component can be claimed under Income from House Property. This is my personal observation and not a universal rule.

On the other hand, an individual borrower in highest income tax slab with self-occupied property is the biggest loser on the tax front. In such cases, the borrower is not aware that HRA component becomes taxable. In other words, if the property is self-occupied then the borrower cannot claim a tax deduction on House Rent Allowance. On the other hand, borrower saves rent in case of self-occupied property. Therefore, loss of tax benefits on HRA is partially/fully compensated by the rental savings. The net impact varies from case to case depending on the rent and HRA. The max tax deduction for the self-occupied property is limited to 1.5L for Principal and 2L for interest component.

2. Income Tax Slab

It’s a no-brainer that the people in highest income tax bracket gain max from Home Loan Tax Benefits. Though it is important to consider all the key factors shared in this post to conclude. Assuming in the 20% tax bracket if salary structure is flexible with very low HRA component. In this case, the working couple can save income tax on a net basis for the self-occupied property after adjusting rent savings. In other words, permutation and combination of all the key factors can throw some interesting results.

3. Interest Rate and Home Loan Tenure

The lower interest rate means less interest outflow but tax savings remains fixed in certain cases like self-occupied property. The exception is once the interest component breaches the threshold of 2L. Therefore, the low-interest rate is good news for borrowers on the tax front. It might be beneficial to continue with a home loan when interest rates are low. This is especially true for people in higher income tax bracket. This benefit is nullified to some extent if your home loan tenure is long.

Besides interest rate, home loan tenure is also a crucial factor. These days banks are pushing home loan tenure of 30 years. It means increased interest outflow. For longer tenure home loans the interest outflow is more than the Home Loan Tax Benefits in almost all the cases. Therefore depending on the prevailing interest rate and tenure, a borrower has to calculate whether it is beneficial to avail home loan only for tax savings purpose or not.

4. Joint Home Loan

In my posts, i suggested joint home loan only in case of a working couple i.e. both the borrowers are availing Home Loan Tax Benefits. It maximizes the tax savings especially in the case of self-occupied property. Even if the key consideration is not to save tax but if both husband and wife are claiming tax deductions, it reduces the overall cost of borrowing. In case, one of the spouses is in lower tax bracket then the proportion of EMI can be adjusted to claim max tax deduction on an overall basis. The objective is that the spouse in higher tax bracket should claim max tax deductions. In some cases, it is beneficial that one spouse should claim 100% tax deductions. Therefore, he/she can pay 100% EMI and claim 100% tax deduction. In other words, you need to fine tune proportion of EMI to claim max Home Loan Tax Benefits.

5. EMI vs Salary

I have discussed this point earlier in the post. At the time of the availing home loan, EMI is 40% to 50% of net take home salary. Over a period of time, with an increase in salary, the EMI as % of net take home salary decrease. As i always suggest my readers to increase the EMI with an increase in salary. Until unless there is a compelling reason to keep EMI low, you should increase EMI. This is important especially if the net tax savings is negative. The increase in EMI will reduce the interest outflow. The +ve net tax savings is the best possible scenario for any borrower. Alternatively, a borrower should thrive to reduce the quantum of -ve tax savings i.e. in case interest outflow is more than tax savings. In such cases, an increase in EMI may have a positive impact.

6. Stage of Home Loan

As we are aware that during initial years of home, the major proportion of Home Loan EMI constitutes interest component. On the other hand, during grey years of the home loan, the principal component forms the major portion of EMI. It is a catch 22 situation for a borrower. Both the Home Loan Tax Benefits and Interest outflow reduce drastically as the home loan is near closure. Therefore, the stage of home loan is a crucial factor to check whether net tax savings is +ve or -ve. For sure, the low-value home loan borrowers availing tax deduction u/s 80C are happy towards the end of home loan tenure as deduction u/s 80C increases. On the contrary, the borrowers relying on interest component u/s 24B for tax savings e.g. in the case property is let out, the loss is maximum during last few years of the home loan.

7. Lump Sum Prepayment

Normally we receive lump sum amount as an annual performance bonus or at the time of maturity of past investment. There is no confusion or dilemma if the family decides to spend the money on an international holiday or big ticket purchase. The confusion is only in case if there is a dilemma whether to invest or prepay the home loan. I covered this topic in my post Should i invest or Prepay Loan ?. It is beneficial to invest if the home loan interest rates are low and some other investment class is delivering higher returns compared to the home loan interest rate. In such cases, it makes financial sense to invest instead of home loan prepayment.

Any lump sum prepayment can upset your tax calculations. Typically, home loan tenure is reduced on prepayment. Therefore, the proportion of principal component increases in EMI. In other words, lump sum prepayment resets the stage of home loan. Thus, it will have the same impact as i shared in point no 6.

Summary: There is no Right or Wrong answer in the case of Home Loan Tax Benefits. It is a very complex calculation to arrive at a right conclusion. Moreover, the conclusion is dynamic in nature. The reason being most of the factors are variable in nature. For example, any change in interest rate or tax slab can turn the calculations upside down. It makes sense to undertake this exercise if you are availing home loan only with an objective to avail Home Loan Tax Benefits.

Alternatively, if you are aware that your home loan is not favorable for you on tax front then you should either try to reduce the interest outflow by prepayment or increase the EMI. As i shared, you can try to maximize Home Loan Tax Benefits by availing joint home loan in case of working couple. The best example is of one of my clients. She bought a property in Thane in Mumbai. She and her husband’s office is in South Mumbai (Nariman Point). To reduce the overall cost of borrowing and to maximize tax benefits they rented out their apartment in Thane. Currently, they are staying on rent in Sion. Wife is claiming HRA as she is in highest tax bracket and also declare loss from the let out property. This arrangement is very much feasible in big cities. They have a valid reason to stay on rent in the same city as they are staying near to their workplace. This arrangement might not be feasible in small towns. Also, the proportion of EMI is 65:35 in favor of wife to maximize Home Loan Tax Benefits. Therefore, optimization of Home Loan Tax Benefits is a complex process :).

Hope you liked the post.

Copyright © Nitin Bhatia. All Rights Reserved.

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Siddhartha Saha
Siddhartha Saha
8 years ago

very good post.. please keep on enlighten us.

Indrakumar Hariramani
Indrakumar Hariramani
8 years ago

HI Nitin . Thanks for your useful posts . In my case i have a flat in Navimumbai , outstanding loan around 17 lakhs . I have sbi max gain loan . I have rented my flat & i am staying in rajkot on rent . My emi is 22595 rs out of which presently 10000 rs is interest component . In max gain account i have kept equivalent amount of outstanding loan in max gain account so i am not paying any interest on it . Please suggest if i am doing correct or should i avail tax benefit and invest my money in other instrument ?

Nitin Bhatia
Nitin Bhatia
8 years ago

As i shared in my post, it will depend on your income tax bracket and income/loss from house property. Currently the average interest rate is approx 7.5% and Home Loan interest rate is near 9.5%. Therefore, at macro level if you don’t need money in near to medium term then it is advisable to prepay and close home loan.

dhanush
dhanush
8 years ago

Sir. One question. Can one claim tax exemption under sec 24 for Home loan processing charges, Leal opinion charges and Stamp duty / registration charges on Mortgage / Home loan agreement. Please let us know.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  dhanush

Stamp Duty and Registration Charges can be claimed u/s 80C. Home loan Processing fees can be claimed u/s 24(b).

banu s
banu s
8 years ago

Help needed urgently:
My mother is a sole owner of a Land .Me and my mother applied for a housing loan in SBI with my salary as only income as my mother was a housewife. The loan was sanctioned and the Land documents were submitted to bank.
Now I got to know that as I have no rights on the property will NOT be able to file the income tax returns.
My mother wants to gift deed the property to my name but the documents are with Bank.
1.Will the Bank Allow this ?
Kindly let me know the process for Gift transfer which is under mortgage with bank so that i can be able to File the Income tax.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  banu s

I don’t think so that bank will allow change in ownership including execution of gift deed till the property is mortgaged with the bank.

emmanuel khawas
emmanuel khawas
8 years ago

Hi sir,

I have taken a loan of Rs. 18 lakhs with 9.40 interest and the tenure is 30 years. If I pay keep paying for the whole 30 years then I’m paying double interest to the bank that is of rs. 36 lakhs. So I’ve gone through some articles where in stated that by making prepayments the interest can be reduced. So I have also downloaded an emi calculator in which I have set the prepayment amount of rs. 2 lakhs yearly that means in next 6 years I’ll finish my home loan if I prepay 2 lakhs every year.

Please let me know if this is true or am I mistaken somewhere ???

Awaiting your response.

Thank you in advance sir.

Regards,
Emmanuel

Nitin Bhatia
Nitin Bhatia
8 years ago

Your understanding is correct.

emmanuel khawas
emmanuel khawas
8 years ago
Reply to  Nitin Bhatia

Thanks a lot sir, I was worried because my aim is to finish the loan in next 6 years and save good interest. :)

Sumedha Upadhye
Sumedha Upadhye
8 years ago

We have an house in joint name between me and my spouse. He has paid the whole loan amount. This house has been given on rent. The rental agreement is on my name. Can the whole income from rental be considered as my income? or should it be split 50/50 % between me and my spouse?

Nitin Bhatia
Nitin Bhatia
8 years ago

The rental income is divided in proportion of ownership in property.

Sumedha Upadhye
Sumedha Upadhye
8 years ago
Reply to  Nitin Bhatia

Thanks

Dev
Dev
7 years ago

hi nitin ji,
i wan to ask a query regarding the complete payment of
home loan .I have a principal outstanding of 25 lakh. I calcuated that
if i do not prepay any thing then bank will charge around 27 lakh as
interest for ROI 10.5% Time: 16 years and instead of pre-paying the loan
if I put the same amount 25 lakh in FD (compounding quartely at 7.25 %
TDS 10%) it is givng me the net savings of around 45 lakhs (deducting
all the components inclusing income tax) time period : 16 years . Please
let me know where i am wrong in calculations.

Thanks !!

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Dev

You have to add tax savings because of home loan tax deduction in case you continue with home loan. Please check my following post for more details on this topic
https://www.nitinbhatia.in/home-loan/home-loan-tax-benefits/

Dev
Dev
7 years ago
Reply to  Nitin Bhatia

so do you agree nitin ji that not closing the home loan is good if we make it as a fixed deposit and continue that for a period of say 20 years? It wil give more savings in the end

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Dev

It is subjective and vary from case to case basis.

Nikhil Damle
Nikhil Damle
7 years ago

Sir,
While claim tax benefit over Rs.1,50,000/- under section 24, on interest paid on home loan , where should the exemption amount be mentioned in ITR form. Pls inform.

Thanks,

Nikhil

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Nikhil Damle

Please let me know which ITR you are filing and whether property is self occupied or let out.

ramona
ramona
7 years ago

Hi Sir,

I am planning to sell my house. I got enquiries from some customers about taking a home loan. In this case, could you guide me as to how this would work as someone mentioned the bank would need my house papers for hypothecation? What all do I need to be careful about?

Thanks in advance.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  ramona

You can sign sale agreement and accept token money. You can handover photocopy of property papers to buyer to process home loan.

Vasu
Vasu
7 years ago

Hi Sir, I have homeloan of 42 lacs since last 5 years, now I consider prepayment of 20 lacs principal saves me 42 Lacs worth of EMI as tenure reduces..appxly. I have around 20 Lacs, advisable to payback home loan or invest elsewhere, which one is more beneficial, sort of which one wisee decision to go usually ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Vasu

You may check my following post for detailed answer
https://www.nitinbhatia.in/personal-finance/should-i-invest-or-prepay-loan/

Abhishek ROHILLA
Abhishek ROHILLA
7 years ago

Hello sir

I am working in a state govt. company. My father, who is Branch Manager in SBI can get a house (on rent) on lease (Rs 30,000/month). My query is that, Can he take my house on lease ? (so we both can live in the same house) I will get Rs 30,000/month which I can give in monthly EMIs I am giving on loan of my house. Is it legal?

In short can a father take lease of son’s house?

Nitin Bhatia
Nitin Bhatia
7 years ago

The rent/lease value depend on area. If your father does not own any other property in same city and staying with you then he can pay rent to you. Also you need to declare rent received as your income.

Suresh Rajendran
Suresh Rajendran
7 years ago

Hi Nitin

I bought property in bangalore in Feb 2015 with home loan of 35L & the total property cost was 50.7Lakhs & 2.5 Lakh as registration fees. Since this is my sole property will i be able to claim additional Income tax benefit of 50,000 per annum ??

Pls note that the registration value with government was about 44L & will that help in claiming 50,000 additional interest tax benefit till loan term is completed ???

Thanks,

Suresh

Nitin Bhatia
Nitin Bhatia
7 years ago

I think you are referring to home loan deduction u/s 80EE. The additional deduction is available only from FY 2016-17 and for the home loans sanctioned between 1st April 2016 and 31st March 2017. Therefore, you are not eligible for additional deduction u/s 80EE.

Guest
Guest
7 years ago
Reply to  Nitin Bhatia

Hello Nitin Sir,

I have purchased a flat of 2100 sqft in hyderabad. My hoan loan of 35L was sanctioned on 25th Jan 2017 and property cost as per registration is 3150000. Am i eligible for 80EE ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Guest

You have not mentioned the consideration value of the property i.e. total cost.

Vinay Singh
Vinay Singh
7 years ago

Hi Nitin,

I have a requirement of 2 BHK (55 L Cost ) but as per my current financial condition I can afford 1 BHK(36 L).I can pay EMI but don’t have enough saving (15%).

Is advisable to buy 1 BHK (nearing possession in August 18 as lender will disburse all amount from bank and my EMI will start ASAP ) and resale to buy 2 BHK OR book a 2 BHK with booking amount of 1 L and pay the amount later( 20% at time of agreement , 10 % 1st slab …and so on).

My current take home salary is 58K and can save 35 K per month. so if I will book new home I will pay maximum amount from my saving as we need to pay it partially and will require the same home loan (30-35L) at the time of possession.

I am staying at rented house and paying 1 L per year as rent.

Please advise.

Thank you

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Vinay Singh

Please let me know the city in which you are planning to buy and also whether you are buying for self occupation or investment purpose.

Ankur
Ankur
7 years ago

Hi Nitin,

Me and my wife both are working professionals in bangalore. And I am in a process of purchasing a new flat in bangalore completely on the name of my wife. And we are going for 80% loan from SBI + 20% down payment. Here my father is contributing us 5 Lakhs in down payment. So my question/doubt is..

1. Can my father directly transfer 5 Lakhs to my wife’s account? Is that fine? bcz we are concerned if IT deptt. may ask about the sources of these funds, then how we will handle them?
2. Or is there any other way to get the funds from MY father and where we can skip from IT deptt. enquiries?

Note: Neither me nor my father is going to be co-owner in the property. And also none of us are going to be co-applicant in loan.

Pls suggest.
Regards,
Ankur

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Ankur

There is NO problem. Your father can gift this amount to his daughter in law and it is tax free.

Shadab
Shadab
7 years ago

Hi Nitinji,

Please help me on tax workings:
I am an IT professional, I booked an under construction flat in Pune in May 2014 and registration was done at the same time hence I had availed tax exemption on stamp duty and registration under 80C in FY 2014-15. My home loan started after couple of months but I did not declare for anything for tax exemption as I was aware that I can get tax exemption on home loan in the FY of completion of construction or possession.

Now I came to know from the builder that I will surely get possession by end of Jan 2017 hence I have declared principal under 80 C and interest component under 24b for FY 2016-2017. Now I want to avail tax benefit on interest paid during construction period.

FY 2014-15
Principal paid – 9049.90
Interest – 57693.70
PEMI 666.00

2015-16
Principal 26999.40
Interest 117606.80

2016-17
Principal 36626
Interest 129047.20

1. Is it mandatory to declare total interest paid during construction period in 5 equal EMI
Like
Total Interest from 2014-2016: 117606.80+ 57693.70 + 666.00 = 175966.5
Interest Declaration: 35193.3 * 5yrs

Or I can avail more if I have room in section 24B after declaring interest for year 2016-17.
Please suggest best possible ways to declare.

2. Can I get tax benefit now on home loan processing fees, Service Tax and VAT. I am expecting possession by Jan end 2017.

3. Next year if my new flat is kept vacant and I leave in another city on rent, can I still get HRA exemption? I have heard its applicable if you have only one property in your name.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Shadab

1. You can claim only 1/5th Pre-EMI interest every year.
2. Home Loan processing fees should have been claimed in the year in which it was paid. There is no tax benefit on VAT and ST.
3. If you don’t have any flat in the city of residence and staying on rent then you can claim HRA.

Shadab
Shadab
7 years ago
Reply to  Nitin Bhatia

Thanks a lot :-)

Riyaz Shaikh
Riyaz Shaikh
7 years ago

My Current property is in a residential complex but I am using for IT trainings

I have purchased new property in commercial complex and will shift my IT training center soon, for new property 60% finance is taken from bank (Commercial property loan)

So Whatever interest I pay in repaying the loan will get consideration in sec 24b??

Awaiting for reply

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Riyaz Shaikh

You cannot claim deduction u/s 80C as deduction is not available for commercial property but you can claim deduction on interest payment u/s 24(b) for commercial property.

sameer
sameer
7 years ago

Sir

My age is 36 years
2 years ago I had taken home loan from HDFC Ltd.
Currently my Home Loan is with HDFC and principal outstanding is 24.50Lakhs .
I have around 10Lakhs of investments in equity & saving bank.
My query is shall i sell my investments to prepay the home loan.
Please advise.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  sameer

It is your personal choice but if i would have been in your place, i would have prepay home loan.

Roni Lucky
Roni Lucky
7 years ago

Hi Nitin, I heard tax saving on 2nd house which was unlimited on home loan interest component is now caped to 2 Lakhs from 2017-2018 onward is that correct. Please clarify and help us to understand

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Roni Lucky

It is correct but you can carry forward the loss.

Roni Lucky
Roni Lucky
7 years ago
Reply to  Nitin Bhatia

Hi Nitin, When you say you can carry forward loss.Does it mean it still unlimited or caped to 2 lakhs?please elaborate.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Roni Lucky

Tax benefit is capped to 2 Lac. If loss from house property is 3 Lac then 1 Lac can be carry forward as loss.

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