Buying a home is considered both an investment as well as an act of fulfilling a dream of living in own house. From a financial perspective, home loan is considered a good debt because you get tax exemption on loan payments and at the same time your asset appreciates with time. Tax exemption on home loan payments (principal as well as interest) is an added incentive for paying EMI rather than rent on a house. Especially for salaried folks, in the higher tax bracket, living in metros where the rent is too high, taking home loan and getting tax exemption on the same appears more attractive.
For those who are planning to buy a home this year, tax exemption on home loan interest payment has been increased by ₹ 1 lakh in the recent budget. This is in addition to the existing exemption of ₹ 1.5 lakhs under section 24(1). In total, this year you can claim a deduction of ₹ 2.5 lakh for interest paid on your home loan. Along with this you can enjoy the exemption of ₹ 1 lakh on payment of principal part of home loan as usual.
But, this increased exemption of ₹ 1 lakh under section 80EE is allowed only under the following conditions.
- The increased exemption is only for this year alone.
- This increased exemption does not apply to existing home loan takers. It is only for the loan sanctioned by the financial institutions during 1st April 2013 to 31st March 2014.
- The loan is taken for your first home i.e., you as a taxpayer do not already own a residential property on that date.
- The value of the property does not exceed ₹ 40 lakhs.
- The loan amount does not exceed ₹ 25 lakh.
Every EMI you pay consists of both principal and interest and in the beginning, your EMI payment goes more towards interest. In other words, the bulk of interest is paid in the beginning of loan period. Through this ‘extra’ exemption on payment of interest, the Government takes some of the financial burden off from the borrower. Many professionals, however feel that it would be even more useful if there is any increase in exemption limit under section 80C which includes payment on principal part of home loan. As rebate on section 80C includes payment on insurance (conditions apply), PF, FD, bonds etc., it would encourage the people to do some savings as well. Nevertheless, along with other tax saving avenues, this move is expected to encourage the first time home buyers as it eases some tax burden at least for the first year. Along with the recent rate cut by RBI, this will definitely give some boost to the real estate industry too.