Deduction on home loans: How helpful is it?

Home Loan as the word suggests is offered to individuals who want to construct or purchase a house.  The property is offered as a mortgage to the bank or lender till the repayment of such loan. So, the bank or financial institution hold the documents to such loans until it is paid back with interest in full.

Types of Home Loans:

•    Home Loan- To Purchase or construct a home

•    Home Improvement loan to renovate homes

•    Home Extension Loans: For adding an extra area to the home.

•    Land Purchase Loan: To individuals looking to buy a land

How Much Can Be Borrowed:

It depends completely on the status of the borrower. Generally, a home loan is offered up to 80-85% of the cost of the property. The interest rates are floating or fixed or partly floating depending on the needs of the borrower.

 The registration charges, stamp duty, and transfer fees are included in the cost of the home. Apart from these, you might have to pay a processing fee to the lender to apply for a loan. Other miscellaneous costs like documentation, a legal fee as applicable.

Eligibility Criteria:

 Lenders look for good credit history, monthly income, any existing EMI’s and a clean chit to the house/property before deciding to grant you the loan. Before applying, we suggest you check your Credit Report and if the credit score is below the said limit, work first on improving the credit score and then decide to apply for a home loan.

Apart from the eligibility criteria documents such as:

•    Latest Credit Score

•    Bank Statement

•    KYC documents

•    Income Statement

•    Property Papers

•    Last 3 Years IT returns required by the bank.

 Deduction on Home Loans: How helpful is it?

 If you are a first-time home buyer, finance minister Arun Jaitley brought an additional deduction of 50000 on interest repayment for you. Currently, home buyers already enjoy a deduction of INR 2 lakh on interest repayment for a self-occupied property under section 24.  A deduction of INR 1.5 Lakh on the principal repaid the amount under section 80C.

The new benefit though has its limitations:

Depending on your tax bracket, the new deduction will allow you to make savings starting from INR 5,150 to a maximum of 15,450.

Instance:

Loan Amount	3500000
Rate of Interest	9.50%
Tenure	15 Years
Monthly EMI	36548
Interest Repayment in the first year	328000

 

 The total deduction allowed on Interest repayment is 2,50,000 (combining both Section 24 and 80 EE)

You cannot claim the benefit on the entire amount of 3,28,000. Additionally, the benefit can only be enjoyed for a period of 9 years out of 15 years as the interest repayment will then fall below 200000. So the tax benefit will become redundant.

What can one do to reap the full advantage of the scheme?

• In such cases, an individual can reduce the borrowing amount to 27 lakh, instead of the earlier 35 Lakh. In this instance then the interest repaid in the first year of the loan would drop to 2,50,000.
  
• Secondly, you can take a joint home loan with your spouse. Section 80 EE does not apply in this case. Your spouse’s Section 24 will suffice to account for the entire loan tenure.
  
• The proportion in which the house loan is taken plays an important role too, the higher the income, the higher the tax saving. So decide the tax ratio accordingly.
  
• Another crucial point to keep in mind is, when applying for a Joint home loan, both partners should have individual incomes to pay the EMI
  
• There is a restriction on the value of land, the cost of land should not exceed 5000000, and the loan amount should not exceed 35 Lakh.
  
• Due to these limitations, if you live in a metro city like Mumbai, Delhi, Chennai this benefit on interest rates might not be beneficial for you. The tax deduction is viable for the tier II cities where the homes are still available for 40-50 Lakhs.
  

Buying a home is the most beautiful feeling. You get to decorate it, and you make a house your home. Cherish these memories, keep the above guidelines in mind before you decide to apply for a home loan. These tips would definitely help you make better home loan decisions.