Making most out of loan

Housing loans give several benefits to home buyers. while some of the tax sops are well-known, others are not. here we look at some of the little-known tax benefits

A home loan not only helps in delivering the abode of your dreams, it also is one of the best tax-saving instruments. Plan-ning your investments around your home loan can help you save taxes on principal and interest paid. But there are other little-known facets to the home loan that a lot of borrowers don't know of. Here we take a look at some of them.

Tax benefit on EMI is on accrual basis Even if you have missed an EMI, you can still claim tax benefits on the interest part of the EMI. The tax benefit on interest is done on an accrual basis and not when the transaction actually takes place. Hence, even if you have missed a few equated monthly instalments (EMIs) in a year in which your interest outflow was supposed to be a certain amount, you are entitled to claim the tax benefit on this amount subject to the maximum permissible tax benefits allowed on interest. However, the same will not be applicable on the principal amount because the tax benefit on principal payment is given on actual payments.

Reversal of tax benefits on principal paid The tax benefit on the principal part of the EMI will be reversed if the home is sold within five years of buying or within five years of taking the home loan. It works in the following way. Let us say you have taken a home loan of Rs 20 lakh. You bought your home and sold it in the fourth year. In the last four years, you have claimed tax benefit on Rs 6 lakh (the maximum possible benefit on the principal paid). When you sell the house, these benefits will be reversed and your fifth year of home purchase will show increased tax liability. The amount on which the tax benefits were claimed in the last four years will be added back to your income and taxed as per the current tax rate.

Only co-owners and co-borrowers are eligible for benefits There have been some cases where people act as co-borrowers to buy a home to help relatives and parents and pay the EMI assuming that they can claim tax benefits. This is not true. You have to be co-borrower as well as co-owner to claim the tax benefits.

You can claim tax benefits on interest paid in construction period When you receive possession of your home, you can start claiming tax benefits. However, you can start paying instalments right from the construction stage. As per the rule, principal payments will not be eligible for tax benefits but the interest paid during construction or pre-possession is eligible for tax benefits for up to five years. The benefits will be spread over the next five years post your possession of the property.

Loans from friends and family is eligible for tax benefits The money borrowed from friends and family for buying a home is eligible for tax benefits. However, only the interest paid can be claimed for tax relief. You do not get any benefit on principal payments to your friends and families. This benefit is only extended to borrowings from banks, housing finance companies, and NBFCs. All you have to do is to procure a legal document from your friend who lent you money with interest rate. The interest rate should be reasonable and should not be misused to save taxes. At the same time, the income received by your friends will be taxable in his or her hands.