A home loan not just fulfills your dream of having a roof over your head. It also acts as an important component of financial planning.
Experts term a home loan among the best tools for long-term tax planning because it saves a major portion of your income from tax and helps you acquire an asset whose value will appreciate over the period of time.
How does one go about it?
A home loan should be taken purely on the basis of need and not solely to save tax.
"One should take a home loan for the purpose of buying a home and not for saving tax," says Sumeet Vaid, founder and chief executive officer of Ffreedom Financial Planners.
How much tax can you save?
On home loans, you can enjoy an exemption on income tax on amounts of up to Rs 2,50,000 per annum including EMIs (equated monthly installments) and repayment of principal.
A home loan installment, like any other loan installment, has two components - principal and interest. According to Section 24 of the Income Tax Act, 1961 a deduction up to Rs 1,50,000 can be claimed towards the total interest you pay on a home loan, while principal repayment of up to Rs 1,00,000 will be separately allowed as a deduction under section 80C of the Income Tax Act.
If you are not staying in the house and have rented it out, the upper limit of Rs 1,50,000 does not apply.
"Under section 25 (b) of the Income Tax Act you can you can deduct the full interest amount by showing rent as your income, even if it is more than Rs 1,50,000," says Vishal Dhawan, founder of Plan Ahead Wealth Advisors.
Is a home loan a long term tax planning instrument?
Experts say it may be wise not to pre-pay a home loan even if you can because it can be convenient in saving taxes.