To save taxes repay your home loan

To save tax you should repay your home loan. Under Section 24 of the Income Tax Act, interest paid up to Rs 1.5 lakhs a year on a home loan can be set off against 'loss' from other heads for a self-occupied property. Suppose the property has been acquired before April 1, 1999, interest up to Rs 30,000 a year can be set off. If the property has been rented out, the entire interest paid is deductible from the taxable income after computing rental income. The loan taken for renovation then interest up to Rs 30,000 a year is deductible.

Under Section 24 of the Income Tax Act, the pre-equated monthly installment (pre-EMI) interest amount (the interest amount paid during construction) is deducted equally over five years from the year of completion of construction.

You can not claim tax benefit on loan taken only for purchasing land, but if you take a composite loan (for land and house construction) you can claim income tax benefits only after the completion of the construction.

You can claim tax benefits on loans taken for construction of a residential property, buy a residential property, extend a house, and for major repairs or renovation of a house. As the construction progresses the home loan installment is given.

However during the construction period, you have to pay pre-EMI interest every month. The entire pre-EMI interest paid is allowed as a deduction (under Section 24) equally over five years starting from the year in which the construction is completed. In case of a self occupied house you can claim total deduction towards interest on the home loan is up to Rs 1.5 lakhs a year. While there is no limit for deduction on interest paid towards a second home loan provided you add the rental income (annual rental value of your second house) to your income. Thus the annual rental value will be the higher of actual rent received a year, municipal value, and fair rent fixed.

Moreover out of the total annual rental value, you will get standard deduction of 30 percent available towards maintenance charges and municipal taxes. Even the insurance premiums paid on the property can also be deducted.

However the deduction on principal loan amount repaid is set to Rs 1 lakh.

In case of personal loan, taken to purchase or construct a house, the tax benefit can be claimed on both principal and interest paid. But if you have borrowed the loan from a friend or relative, you will get tax benefit only on the interest paid.

If there are co-owners of the property then both can claim tax benefits separately, as per the shareholding in the property. If the ratio of shareholding is not mentioned in the purchase agreement, they can execute an agreement on a requisite stamp paper, mentioning the shares in the property, and claim the benefits separately. Both the co-owners can claim tax deductions up to Rs.1.5 lakhs a year separately towards interest paid for a self-occupied house and the entire interest paid on a rented-out house, after computing rental income received, and also up to Rs 1 lakh towards principal repaid.

Under Section 80C of the Income Tax Act, home loan borrowers can claim a deduction of up to Rs 1 lakh from the taxable income on a loan repaid during the year, along with specified savings instruments. Which means along with other specified savings instruments, a home loan repayment amount, the amount spent on stamp paper and registration costs on registering a house, all up to Rs 1 lakh is deductible from the total income.

In case you sell the property within five years from the year when you started claiming tax benefits, you will lose all the tax benefits you had availed under Section 80C (on the principal loan amount) and the amount will be clubbed to the income of the year in which the property has been sold. Whereas the deductions claimed on interest paid under Section 24 will remain intact.