Home loan or a mortgage is a an option which if exercised prudently can fulfill ones dream to own a home of his own even when one is short of finances at that in point. Taking home loan is a decision that is going to affect you for a long time. On one hand it gives you the joy and on the other hand there is the responsibility of paying back the loan in time.
If you are considering taking a loan for acquiring/ constructing a house then ask your self:-
- What is your financial state, annual income?
- How much loan you would need?
Do some research to get the best deal because so many home loan institutions are out there and it can be confusing and difficult to take a decision for such a large investment to be made. Taking help of reputed advisor is beneficial. The amount of home loan granted is based on age, present income/salary, qualifications, Dependents, assets-liability situation, repayment capacity, past credit history and also the cost of the house to be built or bought. The amount of loan disbursed is to be paid back in EMIs (which are calculated using compound interest) in a prefixed time period on fixed interest or floating interest basis. The loan companies package the home loans differently to attract the loan seekers. There are certain initial costs and hidden costs in the structure of the loan therefore, it is important to read the terms and conditions of the loan agreement carefully.
It is worth noting that a housing loan should be protected through insurance. Home loan is a long-term financial commitment for long durations up to 20 years. In case of mishap like death of the loan borrower during the repayment period, the family needs to be protected against the loan liability. Many insurance companies offer Home Loan Protection Plan to take care of such uncertainties. Repayment schedule and terms of the availed loan sometimes need to be altered due to certain changes in the financial position of the borrower. It is always in the interest of the borrower to enquire about the penalties imposed in case of prepayment and delayed payments beforehand from the loan company. During the repayment if the borrower finds it difficult to pay the loan it is better to take the financer in confidence and request him to make changes in the terms to suit your condition. One should be cautious not to be a loan defaulter because it spoils your credibility as a loan borrower which adversely affects your chances of taking loan in future from present loan company or any other. The records regarding the credit history of each borrower is maintained by CIBIL.
To ease the Home Loan pinch one should optimize the tax saving when repaying the home Loan.
Each monthly equated installment to be paid back by the home loan borrower to the lender is made up of two components: the principal portion which is actually the part payment of the original loan amount, and the interest on the loan. Both the principal and interest payments entitle you to certain tax deductions according to Income tax Act while computing the total taxable income of the person in a particular FY. The deduction for principal repayment is allowed under Section 80C and the amount of the deduction is Rs.1 lakh per annum in total along with other investments that fall under Section 80C.
Ex- PF, PPF, Life insurance premium, Pension plans, ELSS, Infrastructure bonds, NSCs
The deduction for annual interest payments is allowed under Section 24(b).
There can be two cases:-
Deduction for interest payment is allowed from the year in which the property is purchased or the year in which the construction is complete.
- The interest paid from the date of the loan and up to the beginning of the financial year in which property is purchased or construction is completed shall be allowed 1/5th in next successive five years along with the interest repayment of that particular financial year.
Also the deduction of interest is allowed in case the house is self occupied or let out
The deduction of Rs. 1.50 lakhs on interest repayment for self occupied property for any particular year including 1/5th interest of construction period. Also 1/5th of interest paid during construction period plus entire interest paid during the current financial year cannot exceed Rs.1.50 lakhs in case of self occupied property.
It is important to keep in mind that the limit Rs.1.50 lakhs of is restricted to Rs.30,000 if the construction is not completed within three years from date of disbursement of loan.
But in case you let-out your house the full amount of interest is allowed as deduction. So, what the interest paid in the current financial year plus 1/5th of the interest paid during construction period shall be allowed in full, without any cap of Rs.1.50 lakhs.
Name of the Guest Writer: Namita Bhagat, Email: namita_nov@yahoo.com, Ph: 9996361415
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