HOME LOANS :

TAX INCENTIVES ON HOME LOANS

Tax Benefits & Implications
Since home loans are subsidized by the government of India, the rate of interest is much lower when compared to other loans available for different needs. And because home loans come with a lower rate of interest, the advantage is that the effective cost gets reduced even further.

Keeping this in mind, take a look at some of the tax benefits which make home loans more appealing and definitely not a burden.

Tax Benefits Available.
Tax benefits are charged on the principal and the interest payments you make at the time you take the loan. A tax rebate of 20% (under Section 88 of the Income-Tax Act) on the principal repaid, subject to a principal ceiling of Rs. 20,000 per year, is available. To you it would mean a tax rebate of Rs.20,000 x 20% - which is Rs.4,000.

Rs.4,000 a year? That's it?
Yes. But do remember that this amount is only against the principal payments made. Most of the home loans earlier were of higher interest receipts as the EMI contained greater proportion of interest payable and minimum of principal. So, if you've taken a smaller loan you won't enjoy the benefit because the principal portion increases as the loan ages.

Tax Benefits on Interest Payments
As per the Income-Tax Act 1961, tax concessions are available on both the principal and interest components of the loan. The last budget has in fact enhanced these benefits, making a home loan even more attractive. The upper limit of the amount of deduction of interest repayment allowed from your gross total income is now Rs. 150,000 p.a. (up from Rs. 100,000 p.a. last year). At the highest tax slab, this translates into a saving of Rs. 51,750 (Rs. 150,000 x 34.50%). However, condition remains that the loan should have been taken on or after April 1st, 1999 and that the house should be completed by March 31st March, 2003.

Besides, Sec. 88 offers you tax benefits for principal repayments. The principal repayment amount included in the overall limit of Rs. 60,000 offered by this section is Rs. 20,000.

Repayment of old loan and taking a new one to avail of the Rs, 1.5 lakh limit
The exemption granted under the Income-Tax Act is for the construction or acquisition of a house and has been allowed with the intention of giving a boost to the housing industry. A purely financial transaction like repaying an old loan and taking a new one does not attract this exemption. The new limit will apply only when a new property has been/is being purchased.

Now that you're familiar with all the tax benefits and implications, go ahead! Choose the loan that's right for you!