hat can I take a home loan for?
Sounds rather silly, does it not? After all, you take it to buy a home.
Not so simple. Check out some of the queries our readers have been asking us:
Can I take a loan for a home under construction?
Can I take it for a plot of land?
What about a home loan for a second house?
Is it true that someone can take a maximum number of two home loans in their life?
Here's tackling the five most common issues that we are faced with when taking a home loan.
Before we proceed, let me explain the tax benefits on a home loan.
~ Section 80C
The principal repayment you make on your home loan is eligible for income deduction under Section 80 C. The principal is the actual amount you borrow from the home loan company and does not include the interest payments.
Incidentally, registration and transfer fees -- if covered in the home loan -- fall under this limit.
Let's say that your taxable income is Rs 100,000 and you repaid the home loan principal of Rs 40,000. Your taxable income drops to Rs 60,000 (Rs 100,000 - Rs 40,000).
The limit under Section 80 C is Rs 1,00,000.
This will include certain investments -- provident fund, public provident fund, life insurance premium, equity linked savings schemes of mutual funds, infrastructure bonds, pension plans -- and home loan principal repayment.
There are no sub-limits within this section; you can utilise the entire Rs 1 lakh exemption for home loan principal repayment deduction if you choose.
~ Section 24
Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. As a result, your taxable income decreases by that amount.
Let me explain with an example.
Salary income: Rs 3,50,000
Interest payment on home loan: Rs 1,60,000
Taxable income = Rs 3,50,000 (income) - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,0001) How many home loans can I take?
You can take as many home loans as you require. One or two or even three home loans.
No law says you need to be servicing just one home loan at a time. There is absolutely no legal constraint.
You can take them all at one time (though I don't see why anyone would).
The only constraint is your ability to pay. If your income is sufficient to repay all the home loans, go ahead.
All your principal repayments and interest payments will be clubbed together to avail of the tax breaks.
Or, you can take them over different times in your life. Let's say you already paid up one loan and want to go in for another. Again, there is no legal restraint.
2) Can I take a loan for any type of home?
You will get the tax benefits irrespective of what type of house you want to buy.
It could be an apartment ready for occupation, an resale apartment (someone selling their old apartment), an apartment under construction, a penthouse, a bungalow ready for occupation or maybe even a loan to construct your own little home.
3) Can I take a loan only if I am buying a home in the same city I reside in?
You are allowed to take a loan to buy a home in another city (other than the one you are currently staying in).
The tax benefits will still apply. They are not dependent on the city of your residence.
If you buy a home in Mumbai but are working in Bangalore, the tax benefits still hold.
4) Can I take a loan for a second home?
When you take a loan to buy a home -- your first one -- the tax man views it as a self-occupied property. Which means he assumes you are buying the home to live in. You will get the tax benefit on the principal repaid as well as interest paid.
Now let's say you are residing in one home (which you own) and buying another. No problem. You can still get a home loan for the second house. But, this time, the tax man will view it differently.
This second house cannot be treated as self occupied because you already own a home in which you are staying.
The tax department views this second house to be 'let out' (they assume you will lease it out on rent).
As a result, you will not enjoy the benefit of principal deduction.
The principal repayment you make on your home loan for your first home is eligible for income deduction under Section 80 C.
For a home loan for your second home, you will not enjoy this.
You are entitled to the interest payment benefit.
However, you can still claim the tax benefit on the interest paid. Here, there will be no limit on the interest repaid (it is Rs 1,50,000 in case of self occupied house under Section 24).
The computation will look like this: Rent received - municipal taxes standard deduction (30%) - interest on home loan = Net amount to be taxed.
5) Can I take a loan to buy a plot of land?
Yes. But you will get no tax benefits.
In fact, the conditions for giving out such loans are rather strict. The loan provider may insist that the plot only be bought from a state authority and the repayment tenure would generally not exceed seven years.
But, if you want a loan to build a house, then you can avail of one and you will also get the applicable tax breaks.
Illustration: Dominic Xavier