Tax Planning with Home Loan

Is Tax planning is legal?

• Yes, It is legal and it is your right to plan tax legally and i am here to plan your tax legally. Tax planning, a legitimate exercise, should not be confused with tax
  avoidance or tax evasion.

• Good tax planning comprises tax compliance and availing proper tax benefits, coupled with proper analysis of the financial implications of a decision.

• There are many situations that demand a proper understanding of, and approach to, tax matters.

One such situation is where an individual has acquired, constructed, repaired, renewed or reconstructed a residential house.

What tax benefits can one avail on a home loan?

Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assessees, who have taken a loan to either buy or build a house, under Section 24(b).

1) Interest on borrowed capital is deductible as follows: If the following conditions are satisfied, interest on borrowed capital is deductible upto Rs 150,000. Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.

• The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed.
• The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction.

If the conditions stated above are not satisfied, then the interest on borrowed capital is deductible up to Rs 30,000. However, the following conditions have to be fulfilled:

• Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property.
• Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
• If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed.

(2) In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of upto Rs 100,000 under Section 80C from assessment year 2006-07.

Important points for Tax Planning by Housing Loan

• Therefore, suggested that a property for self residence may be acquired with borrowed funds, so that the annual interest accrual on borrowing remains less than Rs. 1,50,000. The net loss on this account can be set off against income from other properties and even against other incomes.
• If buying a property for letting it out on rent, get loan from other family members or outsiders, the rental income can be safely passed off to the other family members by way of interest. If the interest claim exceeds the annual value, loss can be set off against other income too.
• At the time of purchase of new house properties, the same should ebe acquired in the names of different family members. You can also purchase property in joint names. This is direct benefit for rental income in different hands.

FAQ on Tax Benefit of Home loan

A person avails deductions allowed under Section 24 in respect of his self-occupied house property and he takes an additional loan for extension/addition to the same house; can he claim benefits from the interest deduction on the additional loan taken?

The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 150,000. Hence if the person's deductions on the existing loan are less than Rs 150,000, then he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year.

If a home loan is taken by the father and the loan has been sanctioned on the basis of the son's salary, can the son claim the tax rebate and deduction in respect of the interest payments?

According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. Hence, in this case only the father will be eligible for the tax rebate.

If a fresh loan is taken to repay an existing loan, which was taken for constructing a house, can the interest on the fresh loan be claimed as a deduction?

Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject to the stated upper limit.

Can a husband and wife, both of whom are tax-payers with independent income sources, get tax deduction benefits, with respect to the same housing loan?

Yes, in this case, the husband and wife (being tax-payers with independent sources of income) can get tax deduction benefits with respect to the same housing loan

In the above case, in what proportion will the tax benefits be shared?

To the extent of the amount of loan taken in their own respective name.