Feb 142013
 

INTEREST ON HOME LOAN AND IT’S TAX BENEFITS

Home loan is the amount that the individuals seek from the bank  to purchase a residential property. The bank usually disburses the amount through a cheque to the person who seeks the loan in his name.However, there is some criteria that the bank follows while granting the loan. The loan seeker must pay the amount and the interest to the bank . The home loan is mainly composed of two parts:

  • The principal component
  • The interest component

The loan seeker pays back the principal amount taken from the bank as a loan; as well as he must pay the interest on this principal.The bank grants loan to the individual once the criteria under consideration is fulfilled.The principal amount is exempted from being taxed under the provisions of section 80C. The  interest on this amount is also deductible from the taxable income under the section 24 .The loan seeker can avail of the tax benefits under these two sections of the Income Tax Act.

This means that the part of the income that the individual uses to pay the interest on house loan as an EMI(equated monthly installments) is exempted from taxation.The principal repayment shall be deducted under section 80C only if the loan seeker is staying in the same house for which the loan is issued.Also, if the person is not residing in that house because he/she is working out of  town, in that condition also  the principal repayment deduction will take place.In other conditions, if the house is not occupied by the owner or is under construction , the deduction under 80C is not possible. The maximum limit for deduction under this section is Rs.1,00,000. EPF, PPF, ELSS, LIC and there are other ways of ensuring deduction under the section 80C in order to save tax.

The EMI that the loan seeker pay towards the interest on home loan can also be exempted from taxation under the section 24 b.The principal amount is paid with interest in installments ;the total amount for the interest portion  over the entire year is exempted from tax and  from a deduction under the section 24. This section covers the interest on amount that is borrowed in order to acquire a property, or facilitate its  construction, renovation or repair. However,the penal interest on housing loan is not allowed as a deduction.

Similarly, if the individual chooses to pay this loan by taking a fresh loan, then the fresh loan is allowed as a deduction under section 24 if and only if the fresh loan is wholly and solely used to pay the original loan.There is no limit as to the number of houses under this section; interest payment on as many home loans is allowed but the limit is Rs 1,50,000 only.The interest payment is directly deducted from the income and is set aside from the taxable income. However, this section provides exemption for home loans for self occupied property only.

So, next time you plan to buy a house and need funding ,you need not think twice to take a home loan from the bank. After all  it’s not just an aid to your funding for the house but its also  going to help you save a lot of your income from the tax.