While buying own house is a dream for many, one cannot ignore that there is also considerable societal pressure on young earners on this point…
The good thing is that the government has given various tax concessions to spruce up real estate activity over the years. These concessions, coupled with the easy availability of loans, have made it easier for people to buy a home early in life.
For a young earner, buying a home is a big commitment, which results in taking a loan & sacrificing a big chunk of monthly income towards the Equated Monthly Investments (EMI).
In today’s post, let us explore how a home loan can impact your tax planning & the pro-active actions you can take reduce the impact on a home loan on your tax planning…
Action # 1: Go through the provisions of tax law so that you claim full tax benefit:Under the tax law, following expenses for home purchase & home loan are allowed as a deduction under the various provisions of the Income Tax Act:
|Expense||Section||Maximum Deduction (₹)|
|Interest portion in EMI||24||2 Lakhs|
|Principal portion in EMI; Stamp Duty/Registration Charges||80C||1.5 Lakhs|
|Interest portion in EMI||80EE||50,000|
|Interest portion in EMI||80EEA||1,50,000|
If you have recently obtained a home loan, spend some time familiarising yourself with the finer conditions of the above provisions so that you claim the tax deductions correctly.Because if you inadvertently claim an excess deduction in your tax return, which is not allowed by law, it can create substantial penalty implications. In case of doubt, better to consult a tax expert.
Action # 2: Revise the income tax declaration:Suppose you buy a house after submitting the income tax declaration to your employer. In that case, you need to proactively revise the same to reflect the correct status.You can do this by getting a provisional interest certificate from your home loan provider & update the amount of deduction under relevant sections basis the details in the certificate.This will substantially reduce the impact of TDS on your monthly salary & increase your take-home salary. This will allow more legroom to make further investments for your financial goals or building a contingency fund.
Action # 3: Do not claim HRA if you are claiming home loan deduction:Once you take possession of your new house, you cannot claim both the House Rent Allowance (HRA) and home loan deduction. Doing so can cause a penalty for tax evasion if your case is selected in the assessment.It is essential to update your tax declaration to your employer & ensure that you are not claiming both deductions simultaneously.Even if both deductions appear in Form 16, you can still rectify this gap when you file your tax return. The only thing will be that you may have to pay some self-assessment tax at that time.
Action # 4: Re-look at existing tax planning investments:Before buying the house, you may have been investing in various other investment avenues to save tax. However, after obtaining a home loan, you need to re-look at your tax planning strategy because of two reasons:
- The amount available to invest from monthly salary may be lower now, given the EMI commitment.
- The principal component towards the home loan will count towards Section 80C limit.
The actions you may take can be as follows:
- If liquidity is a constraint now, stop certain investments – for example, cancel a SIP in an ELSS fund in which you’ve been investing every month. You can start them again as your income increases in the coming years.
- Re-look at your financial goals and preparedness towards upcoming short-term goals. If some investments need to be sold, check out the tax implications before selling them. Avoid taking personal loan or credit card debt.
Action # 5: Explore tax saving avenues like NPS & ELSS:Considering the cost of homes in Indian cities, the deduction you claim in Section 80C can help fill almost the entire 80C limit.If you have a surplus to invest, you can consider the National Pension Scheme (NPS). It gives additional ₹50,000 deduction over & above 80C. However, be mindful of the lock-in requirements.It is also important to note that home loan EMI payments effectively mean investing in “real estate” as an asset class.So, if you have surplus investment, do not be in a hurry to pre-pay the loan. Better to diversify in another asset class – for example, invest in equity through ELSS mutual funds.Unlike NPS, which is suitable for retirement only, the shorter lock-in in ELSS can help meet medium-term goals like kids’ education.