Indian tax payers can invest in several different tax-saving instruments to save taxes. However, one of the best tax-saving avenues continues to be a home loan, especially when you have already exhausted the maximum limit on tax deductions available through these tax-saving instruments. While most home loan borrowers know home loans allow borrowers to save a considerable amount of tax each year, they are clueless about how they can maximize the benefits available under various sections of the Income Tax Act. Through this article, we aim to inform our readers about how they can maximize home loan benefits.
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Tax savings through Section 80C and Section 24b of the Income Tax Act
Section 80C of the Income Tax Act allows home loan borrowers to claim tax deductions up to a maximum of Rs.1.5 Lakh on the repayment of the principal component of a home loan. The problem with Section 80C is that this section does not deal only with home loan tax benefits available on the principal component repayment of a home loan but also several other tax-saving instruments, such as equity-linked saving schemes, ULIPs, national pension schemes, public provident fund, Sukanya Samridhi Yojna, senior citizens savings scheme, etc.
Thus, most of the time, home loan borrowers are unable to claim any tax benefits under Section 80C through a home loan as they already claim tax benefits through one of the other tax-saving avenues mentioned under Section 80C. The main tax savings in the case of home loans come through Section 24b of the Income Tax Act.
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Section 24b of the Income Tax Act states that home loan borrowers who have availed of a home loan and are repaying it, can claim tax benefit on the interest component of their home loan up to a maximum of Rs.2 Lakh. The best thing about Section 24b of the Income Tax Act is that this section deals only with home loan tax benefits available on the interest component of the home loan. If a borrower has two home loans, they can claim tax benefit on the interest component of both the home loans. Similarly, home loan borrowers must know that while there is a limit in the case of self-occupied properties, there is no limit on the tax deduction that one can claim on the interest component of the home loan in the case of let-out properties.
So, the higher the interest you are paying, the better, as the higher will be the tax saving on home loan that you will be able to claim under Section 24b of the Income Tax Act. If a borrower’s total interest outgo is Rs.2 Lakh and they fall within the 30% tax bracket, they will be able to claim home loan tax benefits under Section 24b and save Rs.60,000 every year.
So, what is the ideal tenor and loan amount to maximise home loan tax benefits? Well, if you want to claim the maximum benefits available to Indian tax payers under Section 80C and 24b of the Income Tax Act, you must go for the highest amount that you can avail of and the longest tenor that you can opt for. As an example, if you avail of Rs.50 Lakh loan for a period of 30 years, you would become eligible to claim tax benefits up to Rs.13.93 Lakh every year. However, if you reduce the loan amount to Rs.25 Lakh and loan tenor to 15 years, the total tax savings you will be able to make is Rs.5.54 Lakh.
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Thus, needless to say, the tax benefit is obviously higher when the loan amount is higher and the loan tenure is longer. However, any increase in the loan amount and loan tenor would also increase your monthly EMI, the total interest outgo on your loan and the cost of borrowing the loan. Thus, while a home loan borrower would reap maximum tax savings if they availed of a Rs.30 Lakh loan for a tenor of 15 years at the current interest rates, home loan borrowers shouldn’t just think about tax savings but think about how they can maximize tax savings while keeping their EMIs affordable and their total interest outgo and the cost of borrowing the loan as low as possible. Deciding this is no easy task, so a home loan applicant must consult a tax expert and get their advice.
Maximize Your Tax Savings Through a Joint Home Loan
Another simple way to maximize your tax savings is to go for a joint home loan. A joint home loan is a loan availed by more than one person. Only those individuals who are also co-owners, alongside being co-borrowers, can claim tax benefits in the case of joint home loans. The thing with joint home loans is that borrowers who have availed of a joint home loan can claim tax benefits separately under various sections of the Income Tax Act. So, let’s assume that Mr. A has availed a home loan along with Mr.B. and both Mr.A and Mr.B alongside being co-borrowers on the home loan, are also co-owners of the property. In this case, both Mr. A and Mr.B can claim tax benefits under various sections of the Income Tax Act. Under Section 80C, they can both claim tax savings up to a maximum of Rs.1.5 Lakh, and under Section 24b, they can both claim tax savings up to a maximum of Rs.2 Lakh. Thus, combined, the two can claim tax benefits up to a maximum of Rs.7 Lakh in a given financial year. Borrowers must know that lenders have guidelines regarding who can be a co-borrower in a loan. However, almost all lenders easily accept loan applicants from a couple who wish to borrow a loan together. When a couple applies for a loan, they have higher repayment capacity and creditworthiness, which not only makes them get approved for a home loan quickly but also eligible for a higher loan amount. Further, most lenders lend money to women home loan applicants at a lower rate of interest. Thus, a couple applying for a home loan together does not only enjoy better home loan benefits but also enjoys better home loan deals.
Final Words
Home loans are a long-term commitment. The EMI you pay will impact the way you live and every major decision of your life. Thus, one must avail of a housing loan after thinking through it. They must also avail of a home loan amount they can easily repay. While home loan tax benefits certainly should be considered while deciding the loan amount and loan tenure, one should not avail a home loan only to avail of tax benefits. This would certainly be the wrong approach. One should have a home loan to build a home and an asset for the long run.
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