People paranoid about housing loans can derive solace from the fact that lowering your present debt is as good as a saving for the future -- in the taxman's eye.
Actually, principal repayments can be a better alternative to savings.
Why and how? Well, this is because of the exempt-exempt-tax regime, which is likely to kick in gradually.
Just to recall, the finance minister in this year's Budget had announced his intention to eventually move to an EET regime. It's a regime, which ensures that every penny you earn is taxed.
Currently, there is considerable variation in the taxation of money invested in savings schemes, the tax levied on accumulations or the return earned thereon, and the tax treatment at the final stage of withdrawal.
EET means contributions to specified savings is exempt from tax (E), the accumulation of investments made is also exempt (E) but at the time of withdrawal, the benefits from savings are then taxed (T).
This means that even though an investor would benefit from a reduced tax burden by investing in various tax-savings investment schemes like public provident fund, pension plans among a host of others, at the end of the day he cannot be certain that when it is time to enjoy the benefits of his savings, whether or not the government would axe away his returns by way of imposing a tax.
The idea is to ensure that the money you earn either by way of salary or through your investments gets taxed eventually.
So wherever you invest, eventually, when your investment matures your principal amount will also be taxed, unless there is a special provision which makes the principle amount tax-free.
So, clearly keeping this in mind, pre-paying the housing loan principal, which is eligible for tax deduction under Section 80C, seems like a lucrative option.
This is because the principal you repay will never come back to you and hence cannot be taxed. One can save up to Rs 100,000 in prepaying the loan amount.
Earlier, the amount allowed for deduction in tax in the case of repayment of the principle was just Rs 20,000.
There is no way that the government can subsequently impose any tax unless of course one looks at the capital gains tax at the time of selling one's property. Even there one would get the benefit of long-term capital gains.
Experts however, say that this is an anomaly in all likelihood, will get corrected next year. But till then, one can exploit the opportunity.
According to Section 80C, the principal repayment alone can constitute the entire Rs 100,000 eligible for deduction. This deduction is over and above the deduction already available on housing loan interest up to Rs 1,50,000.
Since some part of your income as a salaried employee goes towards compulsory savings through your contribution to the employees provident fund, you can choose to simply reduce your debt burden and get the maximum tax break.
House warming
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Pre-pay housing loan principal, which is eligible for tax deduction under Section 80C
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Principal repayed cannot be taxed. One can save up to Rs 1 lakh in prepaying the loan amount. Earlier, deduction in tax in the case of repayment of principle was just Rs 20,000
- No way government can impose any tax unless one looks at the capital gains tax at the time of selling one's property
