Mortgage tax comes under the head of property tax and is imposed as property is considered as a source of income. The value of property tax that is to be imposed is calculated by calculating the value of the property on which the tax will be imposed. Mortgage loans are obtained by keeping the property as a collateral with the lender.
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Is it good to take a mortgage to save tax?
The loan against property is a type of loan which is made available to salaried and self-employed individuals on pledging of residential or commercial property as collateral. Being a secured loan, a loan against property offers competitive interest rates as opposed to unsecured loans. They are long-term commitments with tenures going up to 20 years.
One major benefit of a loan against property is that you can save on the tax amount which is payable. Borrowers can avail of tax benefits from a loan against property –
- Borrowers can claim tax exemption from a loan against the property if the loan amount is utilized for business purposes. in such circumstances, the benefits can be claimed on the interest amount that is paid as well as the associated fees and charges that are incurred. These amounts can be claimed as business expenses according to Section 37(1) of the Indian Income Tax Act.
- Salaried individuals can also claim benefits under Section 24(B) of the Income Tax Act if the borrowed funds are utilized for funding the purchase of another residential property. The maximum deduction one can claim is Rs.2 lakh. However, borrowers will only be allowed to enjoy the benefits if they can successfully establish a link between the borrowed funds and their end-use in accordance with Section 24(B).
- Section 37(1) and Section 24(B) enables borrowers to claim deductions only on the interest paid and not on the principal repaid.
- Tax exemptions cannot be claimed if the borrowed sum is utilized to fund personal expenses.
- Borrowers cannot claim benefits by mortgaging residential properties for a loan against property.
How is the tax exemption on home loans calculated?
On availing a home loan, it is important that the borrower make the required monthly repayments as EMIs, which include two primary components – principal amount and interest payable on the amount borrowed. The IT Act enables borrowers to enjoy tax benefits on both these components individually.
Tax exemption on home loans is decided by the Central Government. The Union Budget came up with the proposal in the year 2020 that the income tax benefits may be increased by Rs. 1.5 Lakh on interest payments of home loans. Thus, borrowers now can avail of deductions of up to Rs. 3.5 Lakh. This deduction is made available in Section 80EEA of the Income Tax Act and provides for income tax benefits for a value up to Rs. 1.5 Lakh on home loan interests paid. These home loan tax benefits are made available for the existing exemption of Rs. 2 Lakh, available to borrowers under Section 24(b) of the Income Tax Act.
These home loan tax exemptions can be claimed to purchase houses that have a stamped value of up to Rs. 45 Lakh. Homeowners can claim the benefits on loans availed till 31st March 2021. Thus, borrowers will be able to claim a maximum income tax deduction of Rs. 7 Lakh.
It is to be noted that income tax benefits which are given under Section 80EEA are available to those people who availing home loans under the PMAY CLSS scheme.
Exemption under Section 80C
- Claim a maximum home loan tax deduction of up to Rs. 1.5 Lakh from your taxable income on the principal repayment.
- This may include stamp duty and registration charges as well but can be claimed only once.
Exemption under Section 24
- Enjoy maximum deductions of up to Rs. 2 Lakh on the interest amount payable.
- These deductions apply only to the property whose construction is finished within 5 years. If it doesn’t finish within this time frame, you can claim only up to Rs. 30,000.
Exemption under Section 80EE
- First-time homebuyers can claim an additional Rs. 50,000 on the payable interest every financial year.
- The Home Loan amount must not be more than Rs. 35 Lakh.
- The property’s value must be within Rs. 50 Lakh.
How can I clear my home loan faster?
Before obtaining a loan, it is important that borrowers understand how much they will be able to pay back without compromising on other needs. Once they have an overview of the budget, location, size of the house, etc. in place, it is important to compare multiple options available for obtaining a loan. Different banks and organizations offer different rates of interest, tenure, and other specifications and it is extremely important to compare, understand and analyze which one works best for you both immediately and in the long run.
A few ways to clear home loans faster are as follows –
Paying higher EMIs
One of the easiest ways to clear home loan faster is by paying higher equated monthly installments (EMIs). Opting for an EMI amount will help to clear out the loan in a shorter period of time.
Alternative investments are also a good way to make some money in order to pay back a higher amount every month. Investing in any other reliable source of additional income can be used by the borrower to cover expenses and pay a bigger amount towards repayment of the loan.
Partial pre-payment of the loan amount –
Partial prepayment is another way to lower the loan tenure. The longer time that is taken to pay the loan amount, the more loan interest will be charged over the amount. Additional income from property sold, any tax-saving investments or fixed deposits that are maturing, rental income, and many more such one-time incomes can be used to make a partial prepayment.
Opting for a daily basis interest rate
Banks often charge interest rates on a monthly, quarterly, or daily basis. Under the daily basis scheme, the loan interest is calculated based on the previous day’s outstanding balance. While with a quarterly and monthly system the interest is calculated based on the principal amount at the end of three and one months respectively, which means it takes that much longer for a reduced principal. Therefore it is recommended that you opt for a daily basis as the principal amount which is payable, will be reduced on an everyday basis.
Shifting the loan to a bank offering a lower rate of interest
Borrowers can shift their loan to a bank that offers a lower rate of interest as compared to the current bank. This can be achieved under balance transfer schemes. Under balance transfer, the entire/major unpaid principal of home loan amount is transferred to the bank of the borrower’s choice for a lower rate of interest.
Consistency in paying the loan amount
Lastly, the most important factor to keep in mind is consistency. It is important to pay your installments every single month without fail. The failure on the part of the borrower in making regular payments is one of the biggest issues in clearing a home loan fast.
Is it good to repay a home loan early?
Prepaying or foreclosing home loans can be beneficial if they are planned well and timed right. The benefits associated with the early payment of home loans are –
- During the repayment tenure, the EMI stays fixed but the amount of interest and principal being repaid are changing- initially, the EMI consists mostly of the interest, and less of the principal and vice versa in the later years of the tenure. Therefore, prepaying a loan in the initial years is more profitable than in the later years.
- In the case of Home Loans with a floating interest rate (i.e. the interest rate keeps changing throughout the tenure), banks and NBFCs do not charge any prepayment or foreclosure charges as per the case. So, there are no additional charges when prepaying or foreclosing loans.
- The amount prepaid in favor of your Home Loan is eligible for tax benefits under Section 24B as it comes under the ambit of interest repayment.
EMI Calculator –
An EMI is an equated monthly installment which refers to the amount that has to be paid back to the bank or the financial institution until the entire loan amount that was obtained is fully paid off. The EMI consists of the interest amount plus the principal amount that has to be paid back on the loan. The formula to calculate EMI is as follows –
E = P.r. (1+r) n / ((1+r) n -1); where –
- E – EMI
- P – Principal Loan Amount
- r – the rate of interest calculated on a monthly basis
- n – a term of the loan
It is seen that generally mortgage loans are charged at a lower interest rate as compared to other personal loans. The EMI charged over the mortgage loans are also considerably lower as compared to the EMI of other loans that are granted by financial institutions. A mortgage loan that has been obtained can also be used for other financial purposes as well. It is important to note that in order to obtain a mortgage loan, there are certain minimum conditions that a person has to fulfill. Factors such as the presence of existing liabilities, valuation of property, financial documents, etc, have to be fulfilled.