The festive season usually sees some big-ticket purchases, the biggest of them all being a new house. Buying your dream home is a big decision and will affect your cash flow dramatically. Property has been traditionally owned by men for generations, but it’s time to change that because it makes little sense for one person (usually a male member of the family) to take on the brunt of the entire loan. But it isn’t just that. Co-owning property gives women a legitimate claim over the house that they are managing – a claim that you fully deserve. Also, there are significant tax benefits to having property in your name.
Individual Tax Claims
The Income Tax Act, 1961 gives the benefit of claiming interest paid on housing loans and other tax deductions related to home loans to each of the co-owners. This means that you can both claim these deductions in full on your individual incomes and these tax savings will make a world of difference to your monthly budgets. I’ll talk about each of these sections first and then also give you an example, which will hopefully make these sections seem less like Greek or Latin.
Understand Your EMI
When you take a loan, you pay EMI or Equated Monthly Instalments to repay it. Your EMI consists of Principal and Interest, but not in equal measure. Your initial EMIs will primarily be interest payments and only then move on to principal repayment. Your interest and principal outgo will differ every month. Make sure you obtain the statement from the bank that details the interest and principal you repaid that year to ensure accuracy in your tax returns.
Section 24: Save up to Rs. 60,000/- in taxes
Section 24 of the Income Tax Act allows you to deduct interest paid upto Rs. 2,00,000/- on housing loan under the head, “Income from House Property” which broadly pertains to Rental Income received. The 2,00,000/- deduction is irrespective of whether the property is rented out or occupied by yourself. If you’re in the highest tax bracket of 30%, that’s Rs. 60,000/- you’ll be saving in taxes!
Prior to Budget 2017, the section allowed tax payers to set off the entire amount of interest paid against rent received, but from the Financial Year ending March 31, 2018 onwards, you’ll only be allowed Rs. 2,00,000/-. I’ll be writing a separate column on how carry forward of interest works, so watch out for that!
Section 80C: Save up to Rs. 45,000/- in taxes
Section 80C allows tax payers to deduct several specific expenses and payments such as Insurance Premium, contributions to PF etc. Principal repayment on home loans also figures on the list.
So, now you have also have upto Rs. 1,50,000/- under Section 80C that you can deduct from your income. Highest bracket tax payers save Rs. 45,000/- by availing this.
Section 80EE: Save up to Rs. 15,000/- in taxes
If you’re a first-time home-owner, you can also take the benefit of Section 80EE that allows first time home-owners a deduction of Rs. 50,000/- over and above the Rs. 2,00,000/- deduction that Section 24 offers. To avail of the benefit under section 80EE however, the total value of the property you purchased cannot exceed Rs. 50 Lakh, and the loan you’ve availed cannot exceed Rs. 35 Lakh. The loan should have also been sanctioned during the year.
Let’s say you and your spouse make Rs.6,00,000/- a year, each. You are first time home owners eyeing a property worth Rs. 50,00,000/- on which you’ll have to take a loan for Rs. 30,00,000/-. In the first year of repayment you will pay Rs. 4,50,000 in interest and Rs.1,50,000 in Principal. Here’s how much tax you will save if your spouse takes the loan by himself, and the tax you’ll save if you take it together.
You’ll save Rs. 32,500 in taxes by taking the loan together in this example. Keep in mind that the bigger the loan, the bigger the saving when you split the loan as co-owners. It also doesn’t matter if you earn less than your spouse – splitting the loan will always make a positive difference to both your life and your tax burden.