Tax deduction on home loans: Buying a house with the help of a home loan can not only free you from the hassle of renting but also help you in terms of tax savings. You will not have to pay tax up to Rs 3.5 lakh in a financial year if you take out a home loan.
Under income tax rules, principal payment of a home loan up to Rs 1.5 lakh in a financial year is allowed to be deducted under Section 80C. There is also an additional tax deduction of up to Rs 2 lakh under Section 24B on interest paid on the home loan. Taken together, these two tax benefits will reduce your annual taxable income by Rs 3.5 lakh.
The total tax benefit of the home loan of Rs 3.5 lakh will be reduced by your total taxable income and thus reduce your tax liability as per your income tax slab.
Property purchase costs such as stamp duty and registration are also eligible for deduction under Section 80C.
It is important to note that under Section 80C, several other investments and payments are eligible for the deduction. The maximum deduction allowed under this section is Rs 1.5 lakh in a financial year. Filers, who have no other qualifying investment under 80C, can claim a full deduction of Rs 1.5 lakh in one financial year on the home loan principal payment. (Confused about renting or buying? This calculation will help you make an informed decision)
“Buying a home increases the scope of tax benefits. You can claim the amount you pay for your home loan principal amount as tax deductions. You can also claim costs such as stamp duty and registration as tax deductions. Both of these exemptions are subject to the aggregate limit of Rs 1.5 lakh under Section 80C. You can also claim the repaid amount for the interest component of your loan up to Rs 2 lakh under Section 24B,” Praneet Battina, Investment Research, Fi Money, told FE PF Desk.
Do you need to take out a mortgage to buy a house?
There are two common reasons people buy a home: self-occupancy and investment. Experts say the factors you consider and their importance in your decision-making will differ depending on these reasons.
For example, if you are buying a house for investment purposes, you should consider all other investment options that match your risk profile and return expectations.
“Unlike other markets, the housing market is very localized and depending on specific market conditions, it might be better to invest in lower risk alternative instruments,” says Praneet.
The decision to buy a house for investment purposes also depends on the outlook for the particular real estate market you are considering. If you firmly believe that this market is on the verge of solid growth, buying this home could be a good investment decision.
Also read: Home Rent vs Buy: Which is better in 2022? These points will help you decide
However, if you are buying a house for yourself, the question shouldn’t be “if” but “when”. You can better plan your purchase by investing to accumulate a larger amount for the down payment on your home loan. This will significantly reduce your loan burden, loan term and interest charges.
Experts suggest that whatever your reasons for buying a home, you should first assess your financial situation and stick to a certain budget. The cost of buying a home shouldn’t stretch your finances so thin that you don’t have enough money to save for retirement or any other major life goal.