Want tax benefits on your home loan?

Here, we offer you the tax benefits pre- and post-Budget.

Pre-Budget benefits are applicable for this financial year (2004-05) and post Budget benefits for the next (2005-06).

Interest paid on the home loan

Pre-Budget

(Section 24 of the Income Tax Act)

You can deduct the total interest paid on your loan from your taxable income. You can avail this benefit if you stay in the house for which you took a loan (the tax man refers to this as self-occupied property).

Let's see how this works with some figures.

Taxable income = Rs 350,000

Interest paid towards home loan = Rs 165,000

In this case, there is a maximum limit of Rs 150,000 on this deduction (if you had taken the loan before March 1, 1999, the amount will reduce to Rs 30,000).

As a result, your taxable income will reduce to Rs 200,000 (Rs 350,000 - Rs 150,000).

There has been no change on this front.

You can claim the deduction on interest paid up to Rs 150,000 or the actual interest amount, whichever is less.

Repayment of principal amount

Pre-Budget

(Rebate under Section 88 of the Income Tax Act)

A rebate is when the government gives you a concession on your income.

The actual amount of the rebate varies:

Say you have to pay Rs 18,000 as tax and you are entitled to a rebate of 20%.

You invest Rs 50,000 in the instruments eligible for a rebate. You then save Rs 10,000 of your tax (20% of Rs 50,000).

So instead of paying a tax of Rs 18,000, you pay a tax of Rs 8,000.

Figured how a rebate works? The good news is that if you have a housing loan, you can add it to the various avenues available under Section 88. You can avail of a rebate on the principal loan amount repaid. There is a limit of Rs 20,000 on this amount.

To understand a rebate, the investments covered under Section 88 and the various sub caps, read Smart tax-saving solutions.

Post-Budget

No longer will you get a rebate under Section 88; the Rs 20,000 limit does not apply anymore.

The principal repayment on your home loan will now be available as a deduction from the income. This falls under the new Section 80CCE.

The total limit of the Section is Rs 100,000. There are no sub limits.

So what do you get with the new Budget?

Tax benefits on both interest payments and principal repayment up to Rs 250,000 a year (Rs 150,000 on interest payment + Rs 100,000 on the principal repaid).

Pre Budget:

• Maximum Rs 150,000 deduction on income on interest paid.
• Maximum Rs 20,000 of the principal repaid (including stamp duty, registration fees) as rebate under Section 88.
• Those earning over Rs 500,000 taxable income a year did not get this rebate of Rs 20,000.

Post-Budget:

• Maximum Rs 150,000 deduction on income on interest paid.
• Maximum Rs 100,000 deduction on the principal repaid under the new Section 80 CCE.
• Those earning over Rs 500,000 can also avail these benefits.
• An individual can choose not to invest in any other product under Section 80 CCE (Public Provident Fund, insurance premium, pension product, equity linked savings schemes of mutual funds), but take the entire deduction on the home loan principal that he or she has repaid.

Cnergies is an end-to-end solution provider for Tax-Payroll-HR and provident fund

Image: Uday Kuckian