The Most Tax-Efficient Way To Buy A Home
In today’s scenario buying a home is a fairly expensive affair. A good way to make this big expense as beneficial as possible in the long-term, apart from the cash flow and capital appreciation it would generate, is to be well aware and make efficient use of the taxes you will be eligible for once the home has been purchased. While most people are aware of the deduction on home loan interest and principal components mentioned below, there are a few other tax benefits too that aren’t very commonly known and not utilized by a lot of home buyers.
- Deduction on pre-construction interest
One very useful tax deduction option is the one available on pre-construction interest. It is a known fact that most of the houses that are purchased today are either planned for construction or under construction. In such a case you might have to pay interest on loan even
when the house is under construction. For interest on loan during the pre-construction phase, you can sum up the entire pre-construction interest paid and claim the same in five equal installments. The maximum amount that can be claimed as deduction is Rs. 2 Lakhs.
- Deduction on interest component
You can also claim deduction for the interest paid on the home loan taken to buy a property. A maximum of Rs. 2 Lakhs can be claimed as deduction under section 24. You need to be the owner of the property and also a borrower in the loan to claim this deduction.
If the loan taken is on a property which is under construction, then the deductions can be claimed starting the year in which the construction is completed.
- Deduction on principal component
When you borrow a loan and pay back your monthly installments, a certain portion of the EMI is paid towards the repayment of the principal amount. The principal repayments can be summed up for the year and claimed as deductions under the section 80c. The maximum amount that can be claimed as deductions is Rs. 1.5 Lakhs.
- Deduction on stamp duty and registration charges:
Deduction is also available on stamp duty and registration charges paid on purchase of a property. The claims under Section 80c have to be made in the year in which the payments are made.
- Joint Home loans
Another useful tax deduction scheme that isn’t utilized to the fullest is the benefits on joint home loans. It is a known fact that for individuals the limit for tax deductions is up to 1.5 lakhs and 2 lakhs for interest and principal components respectively, as mentioned above. However, if you take a joint home loan along with your spouse in a 50:50 ratio then both of you can claim the tax benefits individually. This means that for the same loan both of you together can avail a claim deduction of Rs. 3 Lakhs under section 80c and Rs. 4 Lakhs under section 24 reducing the overall loan cost to a considerable extent.
If you fall under the highest tax slab then the total deductions of you and your spouse will be close to Rs. 7 lakhs. It is however important to mutually work out the ownership share to capitalize on the tax benefits. The spouse in the higher tax bracket should have a higher share to ensure maximum benefits are obtained.
- When selling an old home to buy a new one:
Long term capital gains tax is applicable at 20% on the gains (post indexation) on the sale of a home, if the property has been held for more than three years. However, if the property is sold to buy a new property, then this long term capital gains tax becomes exempt.
However, to make use of this exemption, the new house must be purchased within two years of selling the old house and if you are constructing a house, the construction should be completed in three years. If you want to bide time and not want to invest immediately in a new home, you can invest the capital gains in certain bonds like Rural Electrification Corp. Ltd, National Highway Authorities of India etc. to keep them exempt from tax.
It is important to be aware of all these deductions to make sure that the new home bought helps reduce the tax outgo over the loan tenure and eventually increases the net return on investment on the purchase.