Personal Finance: First-time home buyers

 

                               Personal Finance: First-time home buyers

Home loan rates are at an all-time low, thus, prompting many people to invest in their choice of properties. The sops included in the Union Budget 2019 for first-time home buyers include a host of tax benefits, under Section 80C, Section 24 and Section 80EEA of the Income Tax Act 1961. This adds up to ₹5 lakh of tax benefits every year as opposed to the misconception that tax benefits do not exceed ₹1.5 lakh. Here’s what each section offers.

Section 80C: This is one of the most popular and sought after sections among Indian taxpayers as it allows the benefits of reducing taxable income by ₹1.5 lakh every year from their income. The benefit of this section that can be availed by individuals and Hindu Undivided Families (HUFs) only includes the principal amount repaid towards home loan among other eligible investments for tax deduction purposes.

Section 24: This section is of great interest to home loan borrowers as it allows deduction of up to ₹2 lakh on home loan interest provided the property bought is self-occupied by the borrower and his/her family. However, the total interest amount is written off as a deduction if the property is let out on rent.

Section 80EEA: This new section introduced to boost the ‘Housing for All by 2022’ programme of the Indian government allows home loan borrowers to seek an additional ₹1.5 lakh deduction every year over and above the ₹2 lakh deduction enjoyed under Section 24. Since Section 80EEA was introduced to encourage people investing in property for the first time, the benefits under this section cannot be claimed by those who already own a property. Besides, borrowers may seek loan only from recognised financial institutions including commercial banks and housing finance companies, for a property whose stamp duty value does not exceed ₹45 lakh. The loan for the property must be sought between April 01, 2019 and March 31, 2022.

Let’s take an example

The principal and interest components of the home loan equated monthly instalments are likely to change every year. So, it makes sense to be aware of the loan repayment break up well in advance for better tax planning.

Let us assume that you have purchased a property worth ₹50 lakh for which you have secured a home loan to the tune of ₹40 lakh. Many banks and finance houses are offering loans at interest rates as low as 6.7%. You may choose to avail the loan at fixed rates or floating rates depending on your convenience and ease of payment. Assuming that the loan has been sought for 20 years, the total interest payable on the loan would be equal to ₹32,70,985, thus, taking the total repayable amount to ₹72,70,985. The yearly instalment repayable would be ₹3,63,549.

A breakup of the instalment would yield ₹2,65,011 as interest paid on the loan in the first year while ₹98,539 would be towards the principal repayment in the first year itself.

Irrespective of your earnings every year, you can claim ₹98,539 (principal paid) deduction under Section 80C. The remaining ₹51,461 of the total amount of ₹1.5 lakh, which this section permits you to seek tax benefit, can be claimed under the same section from the stamp duty payment. However, deduction on stamp duty payment is valid only for the first year.

Out of the total interest paid during the first year [to use the same example as above, ₹2,65,011], you can claim ₹2 lakh tax deduction under Section 24 if the property is self-occupied. The remaining interest payment of ₹65,011 can be claimed under Section 80EEA of the Act. However, if you have given out the property on rent, you can claim deduction on the entire interest amount paid in the first year under Section 24 of the Act. This way, you have benefited from the total tax deduction of ₹3,63,549 in the first year of taking the loan.

Joint home loans

The Income Tax benefit rules for first time home buyers remain the same even in the case of joint home loans, i.e., home loans taken jointly by husband and wife or by parent and child or by siblings. The benefit of deductions cannot be more than the amount paid towards the loan. This means that for a self-occupied property, one spouse can claim a tax deduction benefit of ₹2, 00,000 under Section 24 while the other can seek deduction up to the remaining amount of ₹65, 011 under the same section. When it comes to seeking tax deduction on the principal amount [ ₹98,539 in this example], one of the partners can either claim full exemption or both the partners can split the amount to claim a deduction depending on how they plan their taxes. This means that either one of the partners in the loan can claim a deduction of ₹98,539 under Section 80C or both the partners can split the principal amount to claim a deduction as per their tax planning.

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