Tax Issues Concerning Your Home Loan Rates

It doesn’t really matter whether you are reading the Mid-Day or the Economic Times. One glance at the newspaper is bound to reveal some mention of the ubiquitous home loan rates. While some people are whining over the SBI teaser rates, launched by the State Bank of India in 2009, claiming that they will bring about another subprime fiasco. Others are mulling over the hike proposed by the Reserve Bank of India in 2011.

To understand the power of these rates, one must just think about what happened in 2008-09. The Indian economy has strong fundamentals. Not many people were out of work, there were still a large number of people who wanted to buy homes. But since the banks wouldn’t lend them money at reasonable rates, the demand virtually dried up. Even biggies like DLF faced a severe cash crunch and had to slash prices by 40% in the NCR. Now since we know that interest rates can wreak havoc on corporate and national finances, let’s have a look at how they affect your personal tax bill.

Home Loan Rates: Should You Consider Using It as a Self Owned Property or Let Out Property

This question is applicable to those who are buying their second property. They usually face an option as to whether they should purchase it in their own name as a second property or buy it in their spouse’s name. There are a couple of things to be considered here:

1.Firstly, if you buy in your name and let out the property, then there is a standard deduction of 30% of the rentals received. On the other hand, if your spouse buys it and rents it, you can claim the interest and principal as deduction as per the applicable rules. Hence, your choice should depend on which of these two amounts is greater.

2.If you buy a property that costs less than Rs20 lakhs, consider buying in your spouse’s name. The government offers a special interest rate.

Home Loan Rates: Tax Treatment During Under Construction Period

Interest paid while the property is under construction can be deducted from your tax bill later. Consult a chartered accountant for more details.

Home Loan Rates: Are Instalment Payments Made Tax Deductible?

Yes, instalments paid are tax deductible. However, there are separate limits for interest and principal. In the early years, the interest far exceeds the limit. In the consequent years, the principal payment far exceeds the upper limit. Hence, the entire amount is never really tax deductible. To know your exact tax benefits contact your relationship banker or chartered accountant.