Home Loan for Tax Benefit – Is It Worth it?

Affordable housing has been one of the major initiatives of the government aimed at ‘Housing for All’. There are various incentives and subsidies to encourage you to buy your own house. Tax benefits are certainly a motivator to get a home loan as it helps you save cash outflow by saving some taxes. Let us discuss if taking a home loan is worth getting the paperwork done, for the sake of saving taxes alone.

Tax Benefits of a Home Loan

When you are purchasing a house, you can get a deduction in stamp duty and registration charges in respect of the purchase of a house property. Further, in case you opt for a housing loan to fund your home purchase, you can have some of your taxes saved. Here are the tax provisions allowing you to save tax on your home loan:

1.Interest on Home Loan – As per Section 24 of the Income Tax Act, 1961, a taxpayer can avail a tax deduction on interest on the home loan. In case you are self-occupying the house property, you can avail a deduction of interest up to Rs. 2 lakh in a year. Similarly, in case you are renting the property, tax deduction can be availed up to Rs. 2 lakhs (net of taxable rental income).

2. Principal Repayment of Home Loan – You can also get a tax deduction on the Principal amount repaid during the year in respect of home loan u/s 80C of the Income Tax Act, 1961. However, this deduction is among the many tax-saving payments and investments like life insurance premium, PPF, tax-saving mutual funds, and FDs etc. and you can only save tax on income up to 1.50 lakh under this section for all the tax-eligible payments taken together.

Critical Analysis of Home Loan as a Tax Saving Tool

Considering the tax benefits discussed above, home loans are certainly seen as a good tax saving tool. However, given several restrictive ceiling limits for availing the tax deduction, the benefits may not translate into significant tax savings.

For example, interest up to Rs. 2 lakh (net of the taxable rental income) is eligible for tax deduction and any interest debited over and above this limit cannot help in saving you taxes for the current year. This can translate into interest debited on a home loan amount of around Rs. 22 lakhs, assuming the current home loan rates to be around 9%.

So, just in case your home loan is for a higher amount, you may not really get the entire tax benefit as may have been anticipated by you. Given the skyrocketing prices for real estate, many home buyers will need to surrender some of such interest amount without tax savings.

Similarly, the deduction for Principal repayment is also limited to Rs. 1.50 lakh a year, and is to be considered for all the tax-eligible deductions u/s 80C taken together. Most of the times, the payment of life insurance premium, PPF and employees’ provident fund take up most of this limit of Rs. 1.50 lakh. Hence, the taxpayer can lose the tax benefit here as well considering the maximum ceiling.

Should you consider Home Loan just for Saving Taxes?

Even while you may be having almost entire amount required for investing in the house property, taking a home loan may help you ease your financial strain at the time of making the big-ticket investment for your house. However, the returns on your investments may not be enough to compensate for the interest so paid. You must realise that the interest you are paying is resulting in 100% cash outflow while you are just saving 30% of it as tax.

On the other hand, home loans can certainly come in handy when the individual is facing a shortage of funds for the purchase of the property or wants to buy a property that is worth more than what they can currently afford.

As such, if you are considering home loan specifically for the purpose of tax savings, you may be taking a wrong road as your expectations in terms of tax savings may not be fulfilled completely due to the reasons as discussed above. But as an added benefit of taking a home loan, saving taxes on them is welcome.