Housing loan is an interesting tax saving tool. Interest on home loan is deductible from your salary, provided you have possession of the house. If your house is under construction, interest will be accumulated till you get possession. Thereafter, deduction will be allowed in five equal installments for next five years, along with the interest of that financial year.
Home Loan Interest Rates: Current Scenario
The home loan interest rates have been on the rise. However, even today the effective interest rates are attractive i.e. housing loan interest at 10% effectively gets reduced to 7%, assuming you are in the 30% tax bracket. Therefore, you should take a home loan if you have the opportunity and the risk capacity to invest in equities and mutual funds. The average return of equities is higher than 7-8% effective interest rate on home loan.
You can prepay your housing loan if the interest being charged is @12% or more, instead of keeping your money in fixed deposits, bonds etc. (@9%). Another way of saving money is to take a 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.
Tax Saving Through Housing Loan Interest
The total housing loan interest deductible is limited to Rs. 1.5 lakh for a self occupied house. You can claim full interest as deduction in the case of let out property, even if it exceeds Rs. 1.5 lakh. You can take loan from your friends and relatives and claim interest deduction, however the principal payment will not be eligible for deduction under section 80C.
The Direct Tax Code is expected from 1st April 2012 and the deduction for principal payment of home loan may be withdrawn. However, the interest deduction may remain as before.
Home loan interest is deductible on an accrual basis. Hence, even if the interest has not been paid to your relative/friend but accrued, then too the deduction is allowed.