Experts recommend that even if you have the available funds to buy a home, it is still better to avail yourself of a home loan
In India, owning a home isn’t just about reaching a personal milestone; it’s also a wise financial decision. And the cherry on top? The Indian government incentivises homeownership through a buffet of tax benefits. Understanding these benefits can substantially reduce your tax burden and boost your savings, whether you’re a first-time homebuyer or a seasoned investor.
. Instead of allocating a lump sum for the home, extending a sizeable down payment and paying off the loan principal with EMI payouts may be financially wiser.
The advantages of home loans
Home loans provide high-value funding at cost-effective interest rates for a long duration. The borrower pays it back through EMIs. After repayment, the financial institution releases the property document to the borrower/house owner.
Low Interest Rates
A home loan has a substantively lower interest rate than any other loan. In case of any financial trouble, you can top up your existing house loan at a cheaper interest rate than a personal loan.
Tax Benefits
Having a home loan provides several tax advantages, allowing you to deduct both interest and principal payments, effectively reducing your taxable income. Owners can deduct up to Rs. 2 lakhs in interest on their house loan for a self-occupied/let-out property under section 24 of the Income Tax Act.
Nevertheless, the deduction for interest is restricted to the lesser of two amounts: a) Rs. 2 lakhs or b) the actual interest paid on all assets owned by a taxpayer.
Liquidity
When you take up all your savings and pay towards a home, you are lowering your liquidity. Opting to save or invest any available liquid funds is a wiser and more prudent financial choice. In any emergency, you can utilise the funds saved or invested. However, if you had used all your savings to buy a home, you might have to resort to selling it to liquidate it, and as you know, it takes much work. Hence, when you avail yourself of a home loan, you are paying only a portion of your investment, and the rest you will be paying as home loan EMIs, thus helping you maintain your liquidity.
Due Diligence
When you choose to go for a home loan, banks do verification from a legal perspective to ensure the documentation is genuine and the ownership is clear. Hence, it reduces your risk of getting tricked decreases. Due diligence investigations by banks act as a shield for borrowers.
Boosts Credit Score
Today, credit scores are a much talked about aspect. When you avail yourself of a home loan and pay the EMIs on time, your credit score and creditworthiness increase. It makes getting other loans simpler if you have a good track record of home loan repayment.
Repayment Tenure
Home loans are the only form of borrowing that offers a long payback period, even up to 30 years. Hence, when you extend the term of your loan, your EMI is less. There are online tools like the home loan EMI calculator, and you can quickly check how your EMI will change when the tenure varies.
So, let’s explore the tax benefits available for homebuyers in detail.
Tax Benefits for All:
Home Loan Interest Deduction (Section 24): This is the crown jewel,
You have the option to claim a deduction of up to Rs. 2 lakh annually on the interest paid towards your home loan. Imagine buying a property worth Rs 50 lakh with a 20-year loan at 8% interest. Your annual interest payment would be around Rs. 4 lakh, but thanks to Section 24, you can deduct Rs. 2 lakh from your taxable income, saving Rs. 60,000 in taxes each year.
Principal Repayment Deduction (Section 80C): A deduction of up to Rs. 1.5 lakh per year is available for the principal amount repaid on your home loan. So, in the above example, if you repay Rs. 2.5 lakh in principal, you can save Rs. 45,000 in taxes.
Registration and Stamp Duty Deduction (Section 80C): The stamp duty and registration charges incurred during property purchase can also be deducted from your taxable income under Section 80C, up to the same limit of Rs. 1.5 lakh.
Double Delight for First-Time Buyers:
Additional Interest Deduction (Section 80EEA): If you’re a first-time buyer with a loan sanctioned between April 1, 2019, and March 31, 2022, and the property’s stamp duty value is less than Rs. 45 lakhs, you can enjoy an added deduction of up to Rs. 1.5 lakh on your home loan interest under Section 80EEA. That’s a total potential deduction of Rs. 3.5 lakh for first-time buyers.
Interest Subsidy under Pradhan Mantri Awas Yojana (PMAY): If you buy a property under the PMAY (CLSS) scheme, you can benefit from an interest subsidy on your home loan, further reducing your financial burden.
However, these benefits are only applicable under the old tax regime. Although standard deductions are offered in the new regime, these specific home loan deductions are not available.
Also, joint ownership allows both homeowners to claim individual deductions on their loans and principal repayments, potentially doubling the tax savings.
Example Time
Let’s revisit our first-time buyer example. With a Rs. 50 lakh loan, Rs. 4 lakh annual interest, Rs. 2.5 lakh principal repayment and Rs. 50,000 stamp duty, here’s their potential tax bonanza:
Interest Deduction (Section 24): Rs. 2 lakhs
Principal Repayment Deduction (Section 80C): Rs. 1.5 lakh
Stamp Duty Deduction (Section 80C): Rs. 50,000
Additional Interest Deduction (Section 80EEA): Rs. 1.5 lakh
Total Deductions: Rs. 5.5 lakh.
This converts to a massive Rs. 1.65 lakh in tax savings yearly, significantly reducing your financial burden and making your homebuying even more affordable.
Owning a home in India doesn’t just come with pride of ownership; it comes with many tax benefits. These benefits can lower your tax burden and free up your financial resources.