Home Loan As A Tax Saving Tool

For every salaried individual tax saving is one of the primary concerns. While there are many tax saving tools available in the market, one of the most fruitful ones is investment in property. Investing in property serves a dual purpose-- saves tax and yields great returns. The rate at which property appreciates is deemed higher than returns of other investments.

A loan taken for purchasing an apartment or a house is a tax- free component in the salary. But this exemption only holds true in case of residential property, apartments or flats and not in case of commercial properties or plots. One can only get an exemption on plots when some construction has been done on them. The loan taken for that construction falls under the tax exemption bracket.

As is common knowledge, any loan has two components:
1.  Principal amount
2.    Interest

Now as far as a home loan goes, both these components are exempted from tax. The principal component gets exemption under Sec 80C. As per this section, one can claim tax exemption up to one lakh rupees. Apart from your loan’s principal component there are various other investment options like LIC, PPF, which come under this section.
The interest portion of the loan gets exemption under Sec 24. In this case whichever of the two is lower, one lakh fifty thousand or the actual interest you are paying, that is the amount which comes under the tax exemption bracket.

All these tax exemptions become valid only after the construction is complete and one has got possession of the residential space in question.

Taking a tax exemption for a home loan does not mean that one can no longer avail exemption under HRA. If you continue to live in a rented apartment, even after purchasing your own house, then you can avail tax exemptions for both HRA and the loan.

Another thing to note here is that your monthly EMI is a combination of principal and interest. Thus, the exemptions need to be calculated accordingly while filing tax returns.   

Having your own house is a dream that most individuals carry and thanks to easy availability of loans these dreams are becoming a reality as well. And if one can add tax benefits to it, it’s a win-win situation all the way!