Use EMI's to help you reduce your tax liability

Use EMI's to help you reduce your tax liability

If you have taken a loan either for the purpose of buying a house or a car or any other purpose, you are required to pay equated monthly installments (EMIs) that comprise of principal and interest. You might be surprised to know that sometimes your EMIs are eligible for tax deduction and home loans EMIs fall under this category. The EMIs on home loans are tax deductible under the Income Tax Act, 1961.

However there are certain conditions in relation to the home loan that make the EMIs eligible for tax deduction.

Split the EMI

One of the most important aspects to be noticed by the tax payer is that the EMI should be broken into two parts - principal and interest. It should be practiced because both interest and principal amount are permitted for tax deduction under different sections of the Income Tax Act. Interest paid on a housing loan is allowed for deduction under Section 24 of the Income Tax Act and the installments paid are entitled for deduction under Section 80 C. The tax benefits for annual interest and home loan principal repayments are Rs 1.5 lakh and Rs1 lakh respectively. Hence it would be better if the tax payer know the amount that come under interest and principal separately.

Deduction on interest paid

You can claim a deduction for the interest paid on a housing loan, loans taken for repair, renewal or reconstruction of an existing property. Such deduction is available on an accrual basis. In fact interest paid on a fresh loan taken to repay another existing loan is also allowed for tax sops. However if a third loan is taken to refinance the second loan, tax rebate on interest payments will not be permitted.

Deduction on the principal repayment

Deduction for the principal is allowed together with the amount paid for stamp duty, registration fee and other expenses related to the transfer of the purchased property. However the repayment of the borrowed capital is deductible only if it is from Central Government, State Government, any bank that includes co-operative bank, LIC or NHB, a public sector company or co-operative providing housing finance, or where the employer is an authority or a Board or a Corporation or a public company or a public sector company or university or co-operative society.

House Ready for Use

A tax payer should know that if the house is under construction or is not yet ready for use, one is not eligible for deduction either on principal or interest. Only if the construction is completed within three years from the end of the financial year in which the capital is borrowed, interest deduction will be allowed. Moreover to avail the tax benefit, the owner cannot sell the property for five years from the end of the financial year in which the possession was taken.

House given on rent

If you are serving the EMI of a property that you have let out then the entire interest irrespective of the maximum limit of Rs 1.5 lakh is deductible under Section 24 but the benefits of principal deduction cannot be availed by you. Moreover the rent earned through this property is added to your taxable income.

Joint ownership and Joint loans

If the property is jointly acquired by a couple and they become co-applicants for the loan then they can individually claim the tax benefit of Rs 1.5 lakh each. This is a wise option as it increases the tax free income for the family. However it should be remembered that the joint ownership of the property is a necessity to avail this benefit.

The tax deduction on home loan is a factor that is attracting majority of the people to buy houses despite of the property prices soaring high.

Disclaimer - All information in this article is sourced from various websites. This article is compiled by team at Moneyfinder and any content is not owned by us. This information is true as on 02nd January 2013.