You have some cash in hand because of the recent annual
performance bonus that you received. You have not yet decided how to use that
money. You have no credit card or personal loan which needs to be settled at a
high priority. You only have a home loan but you are not planning to part
prepay it because you will lose out on tax benefits.
This is a common refrain among home loan borrowers. They do
not want to prepay their loan just because of associated tax benefits. I do not
deny that home loan repayment comes with tax benefits bringing down the
effective cost of loan through calculating Home Emi Calculator.
However, sometimes, these tax benefits on home loans can be
overrated.
Tax Benefits of Home Loans
Deduction in total income by up to Rs 1.5 lacs for principal
repayment under Section 80C of the Income Tax Act
Up to Rs 2 lacs for interest payment for a self-occupied
property under Section 24 of the Income Tax Act. For a let-out or a deemed
let-out property, there is no cap on tax benefit for interest payment.
You may get
limited Tax Benefit for Principal Repayment
You may be re-paying more than Rs 1.5 lacs of principal in a
financial year. The tax benefit is capped at Rs 1.5 lacs per financial year.
Even if you are paying less, your other Section 80C
investments such as PPF, EPF, ELSS, insurance premium etc may exhaust the
entire or major portion of Rs 1.5 lacs even before principal repayment comes
into picture.
You get tax benefit for principal repayment only once you get
possession of the house. Principal repayment done before the financial year in
which you got possession of the house does not get you any tax benefit. This
assumes important for tax-payers who have purchased under-construction property.
[Source: http://www.personalfinanceplan.in/opinion/do-not-overestimate-tax-benefits-on-home-loan-repayment/]
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