or many people, a loan is four-letter word.

But when it happens to be a home loan, there is a lot going in your favour.

Here are the tax implications on the home loan and how to make it work for your benefit.

I. Interest paid can be deducted from your tax

Section 24 of the Income Tax Act allows you to deduct the total interest paid on your loan from your taxable income of the same financial year.

Let's see how this works with some figures.
Taxable income = Rs 350,000
Interest paid towards home loan = Rs 165,000

i. If you are residing in the house

If you actually stay in the house for which you took a loan, then the tax man refers to this as self occupied property.

In such a case, there is a maximum limit of Rs 150,000 on this deduction.

But if you have taken the loan before March 1, 1999, it will reduce to Rs 30,000.

So now your taxable income will only be Rs 200,000 (Rs 350,000 - Rs 150,000).

ii. If you have rented out the house

If you are not staying in that house but are renting it out, you can deduct the full interest amount against rental income from that house.

Let's say you earn a monthly rent of Rs 6,000.

That means an annual rent income of Rs 72,000 (6,000 per month x 12 months).  

You will be able to knock off the Rs 72,000 rent against the Rs 165,000 that you paid as interest.

The balance interest outgo of Rs 93,000 (165,000 - 72,000) will be written off as a loss against your salary income.

This will subsequently reduce your taxable income.

• How your tax is calculated

II. Take advantage of the rebate

A home loan entitles you to a rebate under Section 88 of the Income Tax Act. There is a ceiling of Rs 20,000 on this amount.

The actual amount of the rebate varies:

• If your gross total income does not exceed Rs 150,000, you will get a 20% rebate.
• If your gross total income exceeds Rs 150,000, you will get a 15% rebate.
• If your gross total income exceeds Rs 500,000 lakh, Section 88 will not be applicable.

To understand what a rebate is and what investments are covered under Section 88, read Smart tax-saving solutions.

III. You can include your spouse as the borrower

 Tax benefits are available to both, the main applicant and the co-applicant.

Joint applicants, who are also joint owners, are eligible for tax benefits in the proportion of their share in the loan. The interesting part is that the maximum limits of tax benefits are per assessee. So both spouses can claim benefits up to the maximum limit.

Let's say a couple buys a home jointly (each owning 50%) and take a loan for it. If the interest and principal paid for a loan is Rs 1,50,000 and Rs 60,000 respectively, each of them can claim Rs 75,000 as interest deduction Rs 20,000 as principal rebate.

For the purpose of tax planning, the spouse earning the higher income should claim the higher share to maximise his/her tax relief.

IV. You can take more than one loan

The maximum limits for rebate and deduction still hold. They will be calculated taking into account both the loans.

V. What's not great about the loan

i. All benefits don't apply if the property is in another state

If the property is located in another city, not the one where you are currently residing, the rebate on the loan will not hold.

The only deduction is the interest you are paying on the home loan, which is restricted to a maximum of Rs 1,50,000.

ii. All the benefits don't apply for a plot of land

The total taxable gross income of an individual is calculated under five heads:

• Salary
• Capital gains
• House property
• Business or Professional Income
• Other sources.

A loan taken for a residential house is assessed under the head 'Income from house property'. This will be eligible for deduction under Section 24.  

But if you have taken a loan to buy a plot of land, it will be assessed under the head 'Income from business or profession'. The interest paid towards the home loan can be claimed as expenses against income.

If you don't have a salary income, the interest paid can be put as a loss under the head 'Income from house property'. This is set off against income from other heads.

VI. Use the loan as a basis for tax planning

Plan your tax savings only after you take all the loan benefits into account, which is the rebate and the deduction.

All home finance companies and banks usually issue a provisional certificate at the start of the year. This is based on the Equated Monthly Installments payable in the financial year, with the break-up of the interest and principal paid. 

This will give you a very fair indication of how much prinicpal has to be repaid and how much interest has to be paid in that year. Accordingly, see how this translates to a rebate or interest deduction. 

Based on such projections, you can assess your income and plan for other investments -- like tax-saving bonds and life insurance -- to save tax.

At the end of the year, you will get an original certificate based on the actual EMIs paid for that year. This certificate has to be submitted along with the income tax returns to claim the deduction.

Cnergies is an end-to-end solution provider for Tax-Payroll-HR and provident fund

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