Smart Use of Home Loan May Offer the Best Tax Savings at the Lowest Cost

For someone managing a home loan, this might be one of the best tax saving tools in their pot, especially if they have exhausted all other tax saving opportunities. In addition to saving taxes, your home loan also allows you to create an asset valuing at the lowest interest rate. While many are aware of the low interest rates and tax saving prospects of the home loan, very few know what should be the optimal loan amount and length of tenure that gives them the best of both worlds in the world. lowest cost and fastest reimbursement. There are many limits to this tax saving avenue, and it only offers the best economy if you use it wisely. Here is how to optimize your tax savings thanks to your mortgage.

Why the annual outflow of interest on your home loan is the most critical

You can save income tax on mortgage principal repayment amount up to Rs 1.5 lakh annually under section 80C of Income Tax Act 1961. PPF contributions, investments in ELSS, ULIP, tax benefits on payment of tuition fees, life insurance premiums, etc.

On the other hand, the tax saving offered on the payment of interest on a mortgage under article 24b has no substitute and you can only use this tax saving when you pay interest on a mortgage. Thus, the annual interest expense becomes a deciding factor as to how much tax you can save with your home loan. If you fall into the 30% tax bracket, you can save Rs 60,000 every year if your annual interest expense is Rs 2 lakh or more. The less interest you spend, the less your tax savings will be.

“The deduction for claiming interest paid is available up to Rs 2 lakh within the aggregate limit in section 24b during a fiscal year. In case of renting out property, there is no limit on the interest maximum that can be claimed, however, the loss that will be adjusted against other income items such as salary etc. from home ownership only, ”says Rishi Mehra, CEO of Wishfin.com, Descriptor.

Loan amount and term offering the greatest tax savings

If all you were thinking about was tax savings, you should go for a higher loan amount and longer tenure to give you the maximum tax savings possible. For example, if you take out a home loan of Rs 30 lakh for 15 years at an interest rate of 7% per annum, the total tax you can save in 15 years is Rs 5.54 lakh, if you fall in the 30% tax bracket. On the other hand, if you have a mortgage of Rs 50 lakh with a term of 30 years, the tax savings amount to Rs 13.93 lakh in a similar situation.

However, the longer term also means that your total interest expense is much higher. Instead of paying a total interest of Rs 18.53 lakh on a Rs 30 lakh home loan, you will end up paying a total interest of Rs 52.59 lakh on a Rs 50 lakh loan. As a result, your interest obligation increases much more than the increase in the tax savings. The best way to strike a balance and find an optimal amount is to compare the net interest rate after considering the tax saving benefits. The net interest rate is the effective rate on your mortgage with which you would pay the same amount of interest that you would get by deducting the tax savings from the original interest charged by the lender. At the current going rate of interest, a home loan that is close to Rs 30 lakh with 15 years of tenure can yield one of the lowest net interest rates.

Why is this so?


Excess interest payment on a larger loan amount

It’s a myth that if you take out a bigger mortgage loan, you’ll save more taxes. The interest portion of a monthly mortgage payment decreases each month as the principal repayment increases accordingly. Thus, the annual interest payment remains higher in the first years while it decreases sharply in the second half of the term towards the end. However, the maximum tax saving you can make due to the interest payment under section 24b is limited to Rs 2 lakh.

So any amount of interest you pay beyond Rs 2 lakh per year is not helping you save taxes. In the first half of the repayment, if there are many years in which you pay interest above Rs 2 lakh per year, it remains unproductive and will not help you save taxes.

The large loan amount does not help

A large loan amount with a longer tenure comes with the dual disadvantage of a higher interest expense without any tax savings and a longer debt period. To get the best combination of lower interest and higher tax savings, you can use partial prepayments to reduce your loan outstanding to a level where the annual interest is close to the annual limit of. Rs 2 lakh. This is the optimal level that will help you make the most of the interest savings and keep your interest expenses at a level where they are tax deductible on the full amount.

Few people want a long tenure just to save tax

Only a few are comfortable with debt overdue for longer periods just to save taxes. Borrowers are often looking for ways to use their home loan in a way that offers a combination of better tax savings and quick debt payment.

In this scenario, a short life span will help you lower interest charges and pay off your loan quickly. However, once your annual interest expense is significantly less than Rs 2 lakh, you will enjoy unused tax savings. In such a situation, if you need to convert your house into a bigger house or if you are planning to buy a second house, you can again use the mortgage tax saving opportunity. This will ensure that you are always keeping debt at lower levels and using the tax savings for longer periods at an optimal level.

Boost your tax savings with a solidarity mortgage

If both spouses pay high income tax, then they can take out a higher mortgage and separately benefit from the deduction of principal and interest on the mortgage. As a result, the couple can get a full deduction of Rs 3 lakh under section 80C (Rs 1.5 lakh plus Rs 1.5 lakh) on principal repayment and Rs 4 lakh (Rs 2 lakh plus Rs 2 lakh) ) for the payment of interest under section 24b. This means that a larger home loan of Rs 60 lakh with a shorter tenure of 15 years could give them the optimal combination of greater tax savings and faster loan repayment. “All claimants would also have to be co-owners of the property to be eligible for this deduction,” Mehra said.

Additional deduction on the purchase of an affordable home

If you bought the house under the affordable housing category, an additional deduction of Rs 1.5 lakh is available under section 80 of the EEA. “The deadline to benefit from this additional deduction has been extended until March 31, 2022. Thus, all deductions related to home loans can help you get a maximum deduction of Rs 5 lakh (Rs 2 lakh u / s 24, Rs 1.5 lakh u / s 80C and Rs 1.5 lakh u./s 80EEA) if it meets the specified conditions, ”explains Mehra.

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