Tax Benefit On Home Loan

Terms And Conditions For Home Buyers To Avail Of Benefits Under Section 80ee

1. The purchaser must be a first-time home buyer. 2. The property value must not exceed Rs 50 lakhs and the loan value should be up to Rs 35 lakhs. 3. Deductions can only be claimed if the loan is borrowed from a financial institution. Rebate is not applicable if the loan is borrowed from family members or friends. 4. Tax payer can claim the rebate under Section 80EE only after exhausting the waiver provided under Section 24.

Mortgage Tax Benefits Calculator

One of the advantages of real estate investment is that some homeowners may qualify to deduct mortgage interest payments from their income when filing their taxes. This calculator estimates your tax savings after a house purchase. Financial analysis is provided for an initial period selected by the user & subsequent years throughout the duration of the loan term.

Our homeownership tax benefits guide includes a more detailed calculator which enables users to input more data to get a more precise calculation & has been updated to include 2020 standard decutions and the new real estate tax treatments after the passage of the 2017 Tax Cuts and Jobs Act.

Interest Deduction For Property Under Construction

• In case the stipulated time frame gets exceeded because of the construction of a property, you can ask for only INR 30,000 annually as a house loan tax exemption.
• If you choose to buy an under-construction property and pay the EMIs, you can still make an exception and go for a house loan tax exemption after the property is completely constructed.

Note:- If you wish to purchase a property and pay the whole amount yourself, you can still avail of a house loan tax exemption .

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Mortgage Interest Paid Is Deductible

If your home is valued under one million dollars, which is the case for most of us, 100 percent of your mortgage interest is deductible.

When you first purchase a home, most of the money paid to the bank goes towards interest. On a 30-year mortgage of $250,000 at an interest rate of 4 percent, you can expect to pay $9,905.19 towards interest in the first calendar year of the loan.

You can get an idea of how that deduction compares to the standard deduction in the table below.

Depending on where you fall on the tax table, your savings could exceed the standard deduction by claiming interest alone.

However, the tax deductions for homeowners do not end there.

Scenario : House Owned Jointly With Your Wife

A lot of people are also seen taking joint loans for it helps in increasing their chances of increasing their amount eligibility. When both husband & wife are owners of a property, then they dont face any succession problems. In case you both together have taken a loan, and in case the wife has been working then both can separately claim for deduction under ITR. Both the individuals could claim an amount of about INR 1,50,000 as per Section 80C.

The individual or the owner occupying a property can also claim for the deduction individually on account of their interest in the amount that has been borrowed. The place or house could also be put-up for rent, and it would not be a barrier to availing of the benefits. The deduction can also be claimed in terms of ownership ratio. Here is a list of tax benefits:

• The interest that is paid on the loan amount is eligible as a part of the deduction for INR 2 lakhs according to Section 24, but this is applied when the property is self-occupied.
• The repayment for the principal amount is also eligible as a part of the deduction for about INR 1,50,000 according to Section 80C.

The tax benefit planning for joint owners is done systematically, in such a way that the owners are easily able to avail these benefits and therefore, no part of the repayment goes wasted.

Disadvantages of Taking a Joint Home Loan

Below is the list of some of the disadvantages one can face when taking a joint home loan:

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Deduction For Stamp Duty And Registration Charges

A Stamp Duty is nothing but a tax levied upon purchasing a home that the buyer pays to the sub-registrar in the area where the property is located. You can rebate this amount from your taxes under Section 80C if your total deductions under the section do not surpass the upper limit of 1.5 lakhs. However, it is important to remember that you can only take this deduction in the year that the expense takes place.

• As per the Income Tax Act 1961, the maximum tax deduction allowed on a home loan is as follows:

  Upto Rs 2 lakh on interest payment under Section 24 for a self-occupied houseUpto Rs 1.5 lakh on principal repayment under Section 80CUpto Rs 1.5 lakh on interest payment under Section 80EEA

Why Is Some Mortgage Interest Not Tax Deductible

As mentioned above, the deductibility of mortgage interest is often dependent on whether your loan is secured by the value of the mortgaged property being used as collateral. If the loan is unsecured, like a personal loan, the interest typically cannot be deducted. Whats more, if youre looking to have the interest on a home equity loan or HELOC deducted but have used it for purposes other than purchasing or improving your home, like paying off credit card debt, you will likely be unable to do so.

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Get Your 1098 From Your Lender Or Mortgage Servicer

To fill out the information about the interest you paid for the tax year, youll need a 1098 Form from your mortgage lender or mortgage servicer, the entity you make your payments to. This document details how much you paid in mortgage interest and points during the past year. Its the proof youll need for your mortgage interest deduction.

Your lender or mortgage servicer will provide the form for you at the beginning of the year, before your taxes are due. If you dont receive it by mid-February, have questions not covered in our 1098 FAQ or need help reading your form, contact your lender.

Keep in mind, you will only get a 1098 Form if you paid more than $600 in mortgage interest. If you paid less than $600 in mortgage interest, you can still deduct it.

The Home Office Deduction

If you’re freelance or self-employed and work from home, the home office deduction could save you some money on your taxes. The IRS permits you to write off a portion of the expenses that enable you to conduct business from home. To calculate the home office deduction, you’ll need to figure out how much you spend in total each year and see what percentage of your living space your office takes up. So if you spend $3,000 on eligible expenses and your office takes up 100 square feet in your 2000-square-foot home, you can deduct $150. To qualify for this deduction, your home office needs to be a dedicated space reserved for business use only. Will the IRS come to your home to investigate this? Not necessarily, but you’re better off being honest.

One final thing: In order to take advantage of these deductions, you’ll need to itemize on your taxes. But if your tax-deductible costs of homeownership are high enough, it pays to forego the standard deduction in favor of itemizing.

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Tax Deduction On The Home Loan Principal Repayment Under Section 80c

As per Section 80C of the Income Tax Act,

• You can claim a deduction of up to Rs. 1.5 lakh on the amount paid as the repayment of the home loan principal. This may include stamp duty and registration fees, but can be claimed once in the same year in which they incurred
• The home loan should have been taken for the purchase or construction of a new house.

Note: If you sell the house property, within five years from the end of the year in which it was bought, all benefits that were availed as per the provisions of Section 80C will get reversed and will be counted in your income at the year in which you sell such property.

How To Claim Tax Benefits For Home Loan Repayment

You can claim tax benefits on a home loan when filing your income tax returns or when submitting the home loan interest certificate to your employer.

The process to claim housing loan tax benefits is discussed below:

If you are self-employed, you do not need to submit these documents to claim your home loan tax deductions. However, you should keep the documents at your disposal to compute your Advance Tax Liability every quarter or if any query arises from the Income Tax department in the future.

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Mortgage Tax Savings Calculator

The American Institute of Certified Public Accountants

Information and interactive calculators are made available to you only as self-help tools for your independent use and are not intended to provide investment or tax advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

Tips To Keep In Mind When Taking A Home Loan

• Check and compare interest rates offered by lenders to make an informed decision.
• Check your repayment capacity before taking a home loan.
• Calculate the overall cost of your loan processing fee and other additional charges.
• If you have a credit score of 750 or above, you can negotiate with your lender for better rates.
• Calculate your EMI obligations beforehand for better financial planning.
• Make sure its not a disputed property.
• Have all the loan- and property-related documents in place to avoid loan rejection.

Also Read: What Are The Documents Required For Home Loans?

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What Tax Benefits Are Available On Joint Home Loans

If you apply for a home loan with other individuals, your chances of getting the grant increase. Any bank or financial organisation is more likely to support a house loan application with many borrowers since they know that the loan will be repaid by multiple people. These co-applicants are also referred to as co-borrowers.

Besides increasing their chances of getting a home loan, joint ownership gives the borrowers more repayment flexibility, reducing the risk of paying the EMI all alone. Additionally, borrowers with joint home loans are eligible for joint home loan tax exemptions, which means you and all your co-borrowers or co-applicants can claim income tax benefits separately.

Each co-applicant can claim a tax deduction of up to Rs 2 lakh for interest payments and Rs 1.5 lakh for principal repayment under Section 24 and under Section 80C, respectively. Both applicants must, however, be co-owners of the property and pay the EMIs.

Scenario : When You Are First Time Buyer And Have Taken A Loan From The Residential Property

There was a new development in a new kind of section known as Section 80EE. The section was incorporated to promote ownership of a house as well as create jobs for construction workers. But this kind of tax benefit is available for 1st-time buyers. Also note, that the house value cannot cross an amount of INR 40 lakhs and a loan amount should not cross INR 25 lakhs.

It is also better for a 1st-time buyer to take a loan from a financial institution or any housing finance organisation.

The taxpayer can also claim a deduction for an amount of INR 1 lakh for the same assessment year during which the loan was availed. Whereas the deduction for the loan can be availed or claimed in between the two assessment years.

Also, if you did not claim for an amount of INR 1,00,000 for the financial year, then the user cannot claim for the same in the next assessment year.

For example, Vivek took a home loan for which he is paying an interest of INR 80,000 for the financial year. He claims the deduction for the same amount in the same financial year. Therefore, the balance of INR 10,000 could be claimed by the user in the next financial year.

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Is There A Limit To The Amount I Can Deduct

Yes, your deduction is generally limited if all mortgages used to buy, construct, or improve your first home total more than $1 million for tax years prior to 2018. Beginning in 2018, this limit is lowered to $750,000. Mortgages that existed as of December 15, 2017 will continue to receive the same tax treatment as under the old rules.

For tax years before 2018, you can also generally deduct interest on home equity debt of up to $100,000 regardless of how you use the loan proceeds.

Home Loans Can Provide Tax Benefit

Home loans typically come with a bevy of tax exemptions and deductions both on principal and interest paid every year which allow borrowers to claim taxation benefits and deductions that can help offset the impact of higher loan rates or installments, if any.

A careful reading of the income tax rules and tax benefits announced by the government to promote its mission of Housing for All may ensure that the hike in the policy rate does not translate into a pro-rata increase in interest rates on home loans. This is especially pertinent in the context of the Union Governments aggressive push for affordable housing as envisaged under the Pradhan Mantri Awas Yojana .

This is because of several reasons. Foremost is that mortgage loans typically come with a bevy of tax exemptions and deductions, which if carefully calculated and claimed, cushion the net impact of higher mortgage rates. Here is the lowdown on how the existing tax benefits on home loans could alleviate the possible effect of the rate hike on home loans.

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Misconception : It Will Be A Hefty Deduction

Even for homeowners who itemize their taxes and qualify for the mortgage interest tax deduction, the amount of the deduction is a mere fraction of the amount of interest paid on the mortgage. Once again, a little number crunching is required to fully comprehend the situation because the deduction is not a tax credit.

You dont get a $1 tax break for every dollar spent you get pennies on the dollar. Unlike a creditwhich provides a dollar-for-dollar reduction on actual tax amounts owedthe mortgage interest deduction reduces the amount of total income subject to tax based on the taxpayers tax bracket.

For a simplified example, a taxpayer spending $12,000 on mortgage interest and paying taxes at an individual income tax rate of 24% would be permitted to exclude $12,000 from income tax liability, resulting in a savings of $2,880. In effect, the homeowner paid $12,000 to the bank in interest to get less than a fourth of that amount excluded from taxation.

Spending $12,000 to reduce the amount of money you will pay in taxes by $2,880 simply makes no sense. Worse yet, an honest assessment of the actual bottom-line savings should factor out the value of the standard deduction. The table below provides a comparison.

Choose A Standard Deduction Or An Itemized Deduction

If you choose the standard deduction, you will not need to complete more forms and provide proof for all of your deductions. Its more of the no questions asked deduction, with a flat dollar amount thats the same for most people. For the 2021 tax year, which will be the relevant year for April 2022 tax payments, the standard deduction is:

• $12,550 for single filing status
• $25,100 for married, filing jointly
• $12,550 for married, filing separately
• $18,800 for heads of households

If you choose an itemized deduction, you can pick and choose from various deductions. These include mortgage interest, student loan interest, charitable contributions, medical expenses and more. To itemize your deductions, youll need to fill out additional forms to list each one and provide records, receipts and other documents that validate them.

Both standard and itemized deductions reduce your taxable income.

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Tax Benefits On Home Loan: Faqs

In case of a home loan taken jointly, both borrowers can enjoy tax benefits on his/ her taxable income individually. This includes a maximum of Rs. 2 lakh on the interest paid and up to Rs. 1.5 lakh on the principal amount.

Any family member, friend or even the spouse can be a co-borrower of a joint home loan from Bajaj Finserv. The only condition is that every applicant of the housing loan must be a co-owner of that residential property.

If you take a second home loan to purchase another property, tax benefits are applicable on the interest paid. Here, you can claim the entire interest amount paid as no cap is applied.

Currently, individuals can claim only one property as self-occupied and make tax payments on the other based on notional rent. According to the latest Union Budget of India, a proposal has been put forward stating that an individual can claim a second home as self-occupied property. This aims to help borrowers save more in the form of taxes.

The process to claim tax benefits on a home loan is easy and simple.

• Make sure the residential property is in your name. In case of a joint home loan, ensure you are the houses co-owner
• Calculate the total amount you can claim as a tax deduction
• Hand over the home loan interest certificate to your employer for adjusting the TDS
• If you fail to follow this step, file your IT returns

Self-employed borrowers need not submit these documents. However, they must keep these handy if a query arises in the future.