How home loans help you save taxes

The average age of person/s having own residential accommodation has
come down substantially from about 42 years in the financial year
2001-02 to 31 years in the financial year 2006-07, as per the National
Housing Bank estimates.

Do you know how has this become possible for a vast number of young
Indians to own their dream homes? This was made possible because of
lower interest rates and most importantly tax sops.

Why are tax sops so important?

Over the last few years, the major tax sop available to the employees
was in the form of a standard deduction, which is now withdrawn. There
are virtually no tax sops available to the employees, who are having
significant taxable income and tax liability.

The investment opportunities for the purpose of tax planning are also
limited with a cap up to Rs 1 lakh only. Hence, housing loans have
become an attractive proposition to save taxes, apart from other
equally important aspect like fulfilling the dream of owning a house.

What are the tax sops available through housing loans?

The first and the foremost tax sop is the interest amount that you pay
on housing loans. The interest on housing loans in the initial years
is the major component of the EMI you pay. The interest may exceed the
rental income from house property, resulting in loss from house
property.

In the case of self occupied residential houses, the entire interest
is the loss from such house property. This loss can be set off against
income from other heads such as salaries, business or profession.

The next important tax sop is the installment paid on housing loans.
The installments are allowed as a deduction from the gross total
income on par with other tax saving investments u/s 80C of the Income
Tax Act.

What kind of housing loans are eligible for tax sops?

Housing loan can be taken for the purpose of acquiring or constructing
a property. Housing loan taken for the purpose of repair, renewal or
reconstruction of the house property is also eligible for tax sops.

What kind of house properties is considered for deduction of interest?

All kinds of house properties are considered for allowing the
deduction of interest on loans. The gross annual value from house
property is considered for the purpose of allowing deduction of
interest on loans.

How is gross annual value from house property determined?

If the house property is let out, the fair rental value of such house
property is considered as gross annual value.

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Tips for the first time home loan borrower?

If a person occupies a house property for her/his own residential
purposes, such residential property is considered as self occupied and
there is no income chargeable as 'income from house property'.

If a person occupies more than one house property for her/his own
residential purposes, only one house is considered as self occupied,
according to her/ his own choice. The other house/s are deemed to be
let out and the gross annual value is determined on the basis of the
municipal valuation for such house property.

If a person occupies a house property for self occupation for part of
the year and lets it out for another part of the year, she/he will not
be eligible for the benefit of self occupation and the gross annual
value will be determined as if the house property is let out.

If a person has a residential house, comprising two or more dwelling
units, out of which one is self occupied and the others are let out,
the gross annual value is determined on the basis of fair rental value
for the dwelling units, which are let out. The gross annual value will
be nil for the dwelling unit, which is self occupied.

Net annual value

Net annual value is derived after deducting municipal taxes actually
paid from the gross annual value of the house property, which is let
out. In the case of self occupied property, there will be no deduction
towards municipal taxes.

Interest on housing loan

Interest on housing loan is allowed as a deduction from the net annual
value of the house property. The following major points in connection
with the allowance of interest on housing loan need to be considered:

~ Interest is allowable up to a maximum of Rs 1,50,000, provided the
loan is taken on or after 1st April 1999 for the purpose of
construction or acquisition of house property.

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The 'smartest' home loan EMI solution

~ Interest is allowable up to a maximum of Rs 30,000 only, if the loan
is taken before 1st April 1999 or if the loan is taken for the purpose
of reconstruction, repairs or renewals of a house property is taken
before or after the cut off date, ie, 1st April 1999.

~ Interest is allowed as an expenditure on accrual basis, ie, if such
interest becomes due but is not paid during the year.

~ Interest is allowed as expenditure even if the property is self
occupied and there is no gross annual value.

~ Interest is allowed as expenditure only if the house property is
acquired or constructed within 3 years from the end of the financial
year, in which the loan was taken.

~ The person extending the loan shall issue a certificate to the
borrower about interest payable during the financial year.

~ Interest payable during pre-construction period will be allowed in
five equal annual installments, commencing from the financial year, in
which the house is acquired or constructed.

~ Interest on unpaid interest is not allowed as a deduction.

~ Interest is allowed even if there is charge on the house property.

Standard deduction

In the case of properties which are let out, there will be a standard
deduction @ 30 per cent of net annual value, irrespective of any
expenditure incurred towards the house property. In the case of self
occupied property, there will be no standard deduction.

Loss from house property

There may be a loss from house property, after allowing the deductions
towards municipal taxes, standard deduction and interest on housing
loan.

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Home loan terms you must KNOW

This loss from house property can be set off against income from other
heads of income, such as income from salaries, business or profession,
capital gains and other sources.

If the loss from house property cannot be fully set off against income
from other heads of income, it can be carried forward and set off
against income from house property in the subsequent years. This can
be carried forward up to a maximum of 8 assessment years.

Thus, if there is a loss of say, Rs 1 lakh from house property, after
setting off against income from other heads, during the financial year
2006-07, it can be set off against income from house property up to
the financial year 2014-15.

Installments paid on housing loans

Installments paid on housing loans are allowable as a deduction u/s
80C on par with other deductions allowed u/s 80C. Thus the maximum
limit of deduction u/s 80C along with other deductions u/s 80C, 80CCC
and 80CCD is Rs 1 lakh.

The installments may be towards the amount due under any self
financing or other scheme of any development authority, housing board.
The housing loan may be taken from the housing finance institutions,
banks or even the employer, where such employer is a public
company/public sector company/university/co-operative society.

The installments actually paid during the financial year only will be
allowed as deduction unlike the interest on housing loans, which is
allowed on due basis.

Some important hints for tax planning

~ The house property shall be registered in the name of the person,
who intends to claim deduction towards interest and installment.

~ In the case of working couples having substantial taxable incomes,
it may be worthwhile to register the housing property in the joint
names and take separate housing loans to claim deduction of interest
and installments.

~ If possible, the EMIs may be planned in such a way that the payments
towards principal part of the loan do not exceed the limits available
u/s 80C.

Read more at http://202.54.124.133/getahead/2007/sep/12tax.htm