Tips on home loans

HOUSING LOANS

A home loan helps you reduce your tax burden besides offering the pleasure of owning a house and living in it.

Home is where the heart is, and in today's world, home is what takes up a good part of your income as well. Most people, young and old, have EMIs (equated monthly instalments) to worry about, which makes home loans a subject of pressing concern.

First the benefits, apart from the obvious one of having the pleasure of owning a house in due course of time. Taking a home loan is a great way to reduce your tax burden. Resident Indians are eligible for tax benefits on principal and interest components of a loan under the Income Tax Act, 1961. The tax deduction can be claimed on interest payments subject to an upper limit of Rs 1,50,000 for a financial year.

Moreover, you can get added tax benefits under section 88 on repayment of principal amount upto Rs 20,000 per annum which can further reduce your tax liability by Rs 4,000 per annum (tax rebate of 20 per cent on the principal repaid, subject to a principal ceiling of Rs 20,000 per year).

Benefits aside, most of us still have to grapple with the fine print of a loan agreement. Harsh Roongta, one of the foremost experts in matters relating to loans and chief executive officer of Apnaloan.com, a one-stop shop for all kinds of loans, provides a few tips on dealing with home loans.

Increasing your loan eligibility
The greater your tenure, the bigger the loan eligibility. Since the monthly installment per lakh is lower for longer-tenure loans, banks disburse a higher loan for the same income.

Another way to increase eligibility is to club incomes of allowable relatives such as spouse or parents or children or siblings.

If you have the funds and can invest higher down payment amounts then take a smaller percentage of the cost of the house as a loan.

Show proof of repayment track record for a past loan (car/home/personal loan) or a credit card with a large recognised lender. The bank may be persuaded to increase the income-based eligibility after examining the repayment track record.

Other things being equal, your existing bank (especially a private sector bank) is likely to give you higher loan eligibility than others because it is privy to your savings account.

Funding your down payment requirement
If you are not able to fully finance the margin amount, you can also take a personal loan along with your home loan. This can happen if your monthly income is above Rs 10,000, or if you are a practising professional. But personal loans - being expensive and for a short tenure - are likely to drain your monthly resources.

Take this option only when you have resources to pay off the personal loan from sources other than those taken into account for your home loan.

You can provide adequate additional security by pledging liquid financial assets such as shares, securities, fixed deposits, insurance policies with existing high surrender values, etc. in lieu of the 10-15 per cent margin money expected from you.

You can obtain a loan against the surrender value of your life insurance policy from the life insurance company or from a bank.

You could also take a loan from your employees provident fund (EPF) account if you have had such an account for more than five years.

How to get the best rate for your loan
Unless loan amount is a constraint, approach prospective lenders only after the property is finalised and disbursement is required in the next few days. Most lenders reserve their best rates for immediate disbursement cases.

Bundle your loan request with the loan requirements of your friends and colleagues and thus offer a larger loan portfolio to the bank. This can be specially powerful if the property is in the same building since the legal and technical costs can be reduced which can then be passed on as a benefit to you.

If the property is being bought from a reputed builder, you can also employ the month-end trick by negotiating till the 23rd or 24th of the month. Every bank has monthly targets for its staff and as the month-end nears the bank offers slightly better terms to enable them to fulfil their target.

Remember all rates are negotiable. Check around in the market before finalising your lender.

Can one get both exemption of HRA as well as deduction of interest payable on the home loan?

A number of salaried consumers take a home loan to acquire a residential property but do not stay in that property for various reasons. They stay in rented premises for which they pay rent.

If they are receiving a house rent allowance from their employer a question frequently arises whether they can claim exemption of their HRA based on the rent actually paid by them as well as the interest payable on the loan taken to acquire the owned property. To answer this question we need to look at the relevant part of the Income Tax Act and the rules.

The exemption of HRA is covered under section 10 (13A).

Simply speaking the only conditions for allowing the exemption of HRA are:

1. Rent must actually be paid by the assessee (legal term for the person whose tax liability is being worked out) for the rented premises which he occupies.
2. The rented premises must not be owned by him.

As long as the rented premises are not owned by the assessee the exemption of HRA will be available upto the limits specified in the relevant rules. There is no mention here about any effect on the exemption because of ownership of any other property.

Let us now turn to the deduction of interest payable on a home loan. Contrary to popular perception the interest is not a straight deduction allowed from the salary income. The deduction is actually allowed while calculating the 'income from house property' though the effect (given below), in the case of self occupied property, is the same as allowing it as direct deduction from salary income.

The relevant sections are section 22 to section 27. Again putting it very simply the calculation of 'income from house property' is done as under:

Income from house property (H) = A-S-I, where A = annual value = rental income (net of municipal taxes), less S = 30 per cent of A as a standard deduction, less I = interest payable on any loan taken for acquisition or construction of this property.

1. The point that we must remember is that "income" can also be negative or in other words include a calculation of loss.
2. In the case of self occupied property the annual value 'A' is taken as 'nil' (therefore 'S' automatically becomes nil as 30 per cent of 0 is 0) and 'I' is restricted to a maximum of Rs 1,50,000. Therefore in the case of self occupied property the result of calculation of 'income from house property' or 'H' will always be a loss to the extent of the interest payable on the home loan or Rs 1,50,000 whichever is lower.
3. Where the property is given on rent the annual value will be calculated based on the rental and the final income (or loss) from house property will be calculated as given above. Please note that in such a case there is no restriction on the maximum amount of deduction available in respect of 'I'.

'Income from house property' is either taxed (if it is positive) or if it is a loss, it is allowed to be set off against the income from other heads including salary (and hence the popular misconception that interest on home loans is allowed as a deduction from salary income as the impact, in the case of self occupied properties, is the same as a direct deduction of the interest from salary income).

There is nothing in the section that affects the exemption of HRA at all.

Also there are no conditions that restrict the availability of deduction of interest based on the assessee's stay in any other premises.