Buying a home of our own is usually the sign biggest investment decision most of us will make in our lifetime. However, there are very few people who will be able to dip into their savings to buy a home outright.
For those among us who are considering taking a loan to fund the purchase of a property, there are plenty of options on offer. Housing finance is a lot more accessible these days. With increasing competition among housing finance companies, interest rates have also headed southwards. So, this is a good time to consider buying that dream house you've been eyeing for so long!
In this article, we will take a brief look at some of the tax implications of taking a housing loan. It's quite likely that you may have a specific situation or query; do consult your charted accountant or tax advisor, who will be able to guide you better.
Why should I borrow, when I can use my own savings?
You may be one of the lucky few who can afford
to buy your home using your own savings, but wait! Tax experts
opine that it is still a better bet to take a loan to fund your
purchase.
For one, you don't have to lock up your funds. While real estate investments generally appreciate, other investment options such as the stock market, despite the current gloom! Typically tend to yield higher returns over the long term. For another, you are paying back in a very depreciated currency indeed! With the value of the rupee falling steadily over the years, the real value of what you pay back over the years will be much lower than when you commenced.
Interesting News!
The best part of taking a housing loan is that
both the principal (the amount that you borrow) and the interest
(the amount that you repay at fixed intervals) are both eligible
for tax benefits.
Under Section 88 of the Income-Tax Act, 1961, you can claim a rebate of 20% of the principal that you repay every year, subject to a limit of Rs. 20,000/-, (The limit was earlier Rs. 10,000/-, but was recently raised to Rs. 20,000/- in view of the increased outlay on housing). [This may vary, so you please be in touch with your C.A.]
Capital Gains A Capital Idea!
Let's say you're a canny investor and disposed
off your holdings before the market crashed. In normal
circumstances, you would have to pay capital gains tax. Not so,
if you invest in a new residential house! Under Section 54 of the
Income Tax Act, you can claim full exemption on capital gains, if
the entire net consideration is invested in the house. There are
a whole lot of other conditions that you need to be aware of,
such as what constitutes a long-term capital asset, whether you
can invest only a part, the conditions to be satisfied after
availing the exemption etc, which are beyond the scope of this
article. Your tax advisor should be able to guide you in the
matter.
Taking a new loan to repay an old loan!
It's one of the smartest moves you can make!
If you are one of those people who took a housing loan a few
years ago, when interest rates were higher, you can now repay the
old loan by taking a new loan at a much lower interest rate! A
number of multinational Banks are aggressively marketing these
loans. The best part is that this is entirely legal; just imagine
the savings you stand to make, if the interest rate goes down by
a point or two, on a loan of a few lakhs! There has been some
confusion about the tax treatment of this procedure; a few tax
advisors we spoke to felt that this was not admissible, while
others said that it would qualify. Nevertheless, there is a CBDT
circular dated August 20, 1969, which specifically says that if
the second loan has been taken to pay off the first one, interest
payable on the new loan qualifies for a deduction.
This Article Is Only To Have An Idea. As The Act Changes Very Frequently, You Please Be In Touch With Your C.A.