Buying your own home is a big financial responsibility. Taking a mortgage for the same seems like such a big burden that most people tend to shy away from taking this step. However, there are loads of benefits that home loans offer as well that should serve as an incentive if you are planning to buy one. Here are some direct benefits of taking a home loan.
Tax benefits- The EMI for your mortgage loan has two components, the principal and the interest.
Interest payment- According to the dictates of the Income Tax Act, you can claim benefits under Section 24 on the interest payment you make. The processing fee that you paid at the time of taking a loan or a penalty paid to close the loan prematurely can also be claimed under this section. The maximum limit for deductions for property (under the head of interest payments) that is self-occupied can be Rs. 1.5 lakhs.
Principal payment- For principal payments you can claim deductions under Section 80 C. However, the maximum deduction that can be claimed under this section is Rs. 1 lakh along with other investments such as insurance premiums, ELSS, school fees, etc. Deductions on stamp duty and registration fee can be claimed in the financial year in which the property was purchased. Please remember, all these deductions are valid only if the property is self-occupied. Also, all deductions are reversed if the property is sold within the first five years of purchase.
Let’s consider an example. Rajesh and Ruchi Kishanpuriya decided to take a joint home loan of Rs. 60 lakhs in a 50:50 ratio in 2012. In a joint home loan, both the individuals can claim double tax benefits under the heads of principal and interest payments. Under Section 24 of the Income Tax Act, they can get a tax benefit of a maximum of Rs 1.5 lakh each on the interest they are paying. Similarly, under section 80C they are eligible for a tax exemption of upto Rs. 1 lakh for the principal amount of the loan. So in effect, they are saving up to Rs. 5 lakhs on taxes (1.5+1.5 lakhs each interest payment = Rs. 3 lakhs and 1 lakh each on principal payment= Rs. 2 lakhs). However, they are able to reap these benefits because they are co-owners of the property and it is self-occupied.
Other benefits of taking a home loan
Impacts your credit score
A loan that is backed by an asset is called a secured loan. A home loan is a secured form of loan and such loans have the largest positive impact on your credit score when they are repaid on-time.
A loan approval by the bank is a validation of your property
If Bank A agrees to give you a loan on the property of your choice, it means it is satisfied with the evaluation process of your home to be and gives its stamp of approval on the property. A lender approved property is always easier sell, if and when required.
Although there is no denying that taking a home loan is a big financial burden, one cannot ignore the fact that it comes with multiple benefits too. Being aware of the tax benefits of a home loan, can help you maximize your savings on your investment.