Every month, when we get our salary, we download the payslip with a burning heart. This is not because of the insufficient salary or because of the impending expenditures for the month. This is because of the huge amount deducted at source by the income tax authorities that bites off a major chunk of the total income. The cutting makes our take-home salary look like an ant in front of an elephant and the deducted amount is enough for an upper-middle-class family to live off happily. We searched frantically for a proper solution and finally got the only solution as taking a home loan. Let us see the tax benefits you can avail from this mammoth debt and some important information pertaining to the same.
Two divisions and two exemptions
Home loan is divided into two payments just like other loans, blended into a single payment. The tax wavering is, however, managed under different sections of the legislatures. Take an example here. If you take a home loan of a certain principal at a rate of interest of 8.4% for the tenure of 20 years, the amount you are paying in total is almost 1.4 times the total payable amount at the end of 10 years. The difference in the total amount is the higher interest you are paying for the extra 10 years and the tax exemption calculated for interest every year depends only on the paid interest. The divisions are:
Principal amount: Every year, you will be paying a certain percentage of the total loan amount and usually, this amount will be less in the initial years and keep on increasing year and year. The tax deduction on the principal paid each year is different based on the purpose of the house, but the section covering remains the same. Usually, if the house is self-occupied by the applicant there is a cap to the maximum relaxation availed in a year. On the other hand, if the house is given on rent, the rent gets added to the income and the upper cut-off to the maximum redemption is lifted.
Interest on the Principal: Based on the number of years selected for repayment, the interest varies. The interest is higher in the initial years and lowers as the tenure nears completion. The whole interest is eligible for tax reduction under a section other than those covering principal amount.
When you attempt to pay-off the loan earlier than the scheduled tenure, you can do it either by paying an extra number of EMI’s in the same month or by paying higher amounts of installments. The interest, however, remains the same since additional payments are reduced directly from the principal amount.