Section I: Income Tax and Your House

• Ques: Deduction On Home Loan Interest
• Ans: Key points:
  • The interest on home loan is deductible from your salary income, provided that you have obtained possession of the house.
  • If the house is under construction, then interest will be accumulated till you get possession. Thereafter, deduction will be allowed in five equal installments for next five years, along with interest of that financial year.
  • The total interest deductible is limited to Rs. 1.5 lakh for self occupied house.
  • The interest rate of home loan has been on rise. However, even today the effective interest rates are attractive i.e., home loan interest at 10% effectively gets reduced to 7% assuming you are in 30% tax bracket.
  • Therefore, you should take home loan if you have opportunity and risk capacity to invest in equities and mutual fund, as the average return of equities is higher than 7-8% effective interest rate on home loan.
  • You can prepay home loan if the interest is being charged @12% or more, instead of keeping money in fixed deposits, bonds etc. (@9%).
  • Another way of saving money is to take home loan with overdraft facility so that you can save interest by depositing additional funds in the home loan account. Banks like SBI, HDFC, and HSBC offer these loans as home saver, smart home etc.
  • You can claim full interest in case of let out property, even if it exceeds Rs. 1.5 lakh.