A Home Loan is one of the most significant financial commitments an individual makes in their lifetime. It is a long-term liability that requires careful planning and management to repay it on time. Along with the responsibility of repaying the loan, a homeowner also has to plan their finances to maximise their tax saving on the Home Loan. This article will discuss some innovative ways to save money on your Home Loan and maximise your tax savings.
Choose the Right Home Loan
Choosing the right Home Loan is the first step towards saving money on your Home Loan. The interest rate is one of the most critical factors determining your Home Loan's cost. A low-interest rate will help you save money on your monthly EMIs and reduce your overall interest cost. You can compare the interest rates offered by different banks and financial institutions and choose the one that provides the lowest rate. You can refer to the housing loan interest rate calculator to get the correct calculations based on rates and loan amounts.
Opt for a Longer Loan Tenure
Opting for a longer loan tenure can reduce your monthly EMI and make your Home Loan more affordable. However, a longer term will increase the interest you pay over the tenure. Therefore, you need to find the right balance between your EMI and the loan tenure to ensure you can repay your loan comfortably without stretching your finances.
Make Prepayments
Making prepayments is an effective way to save money on your Home Loan. When you make prepayments, you reduce the outstanding principal amount, reducing your interest cost. You can make prepayments in two ways- either through a lump sum payment or by increasing your EMIs. Making prepayments in the early years of your loan tenure is advisable, as it can help you save significant money on interest. Use the housing loan interest rate calculator to complete the prepayment calculation.
Switch to a Lower Interest Rate
If the interest rate on your Home Loan is higher than the prevailing market rate, consider switching to a loan with a lower interest rate. You can negotiate with your existing lender or transfer your loan to another offering a lower interest rate. However, you must consider the processing fees and other charges before switching.
Avail Tax Benefits
The government of India (GOI) provides several tax-saving options on Home Loans to encourage people to invest in a property. A tax deduction can be claimed for principal repayments, interest payments, and registration fees. You can be eligible for a deduction per the 80C section of the Income Tax Act of up to Rs 1.5 lakh, depending on the amount of principal repayment. Under Section 24(b), you can claim a deduction of up to Rs 2 lakh on the interest payment. You can also claim a deduction of up to Rs 1.5 lakh on the registration charges under Section 80C.
Home Loan Insurance
Home Loan insurance is an insurance policy that covers the outstanding balance of your Home Loan in case of the untimely demise of the loan taker. It provides financial security to your family and ensures that they do not have to bear the burden of repaying the Home Loan. Home Loan insurance is not mandatory, but it is advisable to opt for it to secure your family's future.
Opt for a Floating Interest Rate:
A floating interest rate is a variable interest rate that changes with market conditions. It is usually linked to the benchmark rate, such as the repo or MCLR. A floating interest rate is beneficial in the long run, allowing you to exploit market fluctuations. If the interest rates decrease, your EMI will also decrease.
Make Use of the Balance Transfer Facility:
If the interest rate on your Home Loan is higher than the market rate, consider transferring your balance to another lender that offers a lower interest rate. This is known as a balance transfer facility.
When you share your credit, the outstanding principal amount on your loan is transferred to the new lender, and you start repaying your loan to the new lender at a lower interest rate. This can help you save significant money on your interest payments.
Claim Tax Benefits on Joint Home Loan:
If you have taken a joint Home Loan with your spouse or any other family member, you can separately claim tax savings on the Home Loan through deductions on the principal repayment and interest payment. This means that both you and your spouse can claim deductions of up to Rs 1.5 lakh each on the principal repayment and up to Rs 2 lakh each on the interest payment. This can help you maximise your tax savings on Home Loans.
Claim Tax Benefits on Home Renovation Loan:
The Income Tax Act provides a deduction for interest payments on home renovation loans under Section 24(b). You can claim a deduction of up to Rs 30,000 on the interest payment on a home renovation loan. In addition, as a senior citizen, you can claim a deduction of up to Rs 50,000.
Claim Tax Benefits on Second Home Loan:
If you have taken a second Home Loan, you can claim tax deductions on the interest payment under Section 24(b) of the Income Tax Act. You can claim a deduction of up to Rs 2 lakh on the interest payment for a second Home Loan. However, you cannot claim tax deductions on the principal repayment for a second Home Loan.
Claim Tax Benefits on Home Loans for Rental Property
If you have taken a Home Loan for a rental property, you can claim tax deductions on the interest payment under Section 24(b) of the Income Tax Act. The interest payment on a Home Loan for a rental property is considered a business expense, and hence, it is eligible for tax deductions. The tax deduction on the interest payment for a Home Loan for a rental property is calculated based on the actual interest paid during the financial year.
The total interest paid during the year is considered a deduction from the rental income earned from the property. However, it is essential to note that the deduction cannot exceed the net rental income earned during the financial year.
Final Words
You can obtain the finest tax saving on Home Loan methods by choosing the right loan, opting for a longer duration, making prepayments, moving to a cheaper interest rate, availing tax benefits, joint ownership, and opting for Home Loan insurance!
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