Mr. and Mrs. Sharma, both in their early 30s, after completing 5 years of their married life decides to have a house of their own. Both husband and wife are working at good positions in corporate and are regularly paying income tax on their incomes. After sheer hard work and a lot of savings, they will finally be able to make a house of their own. Both of them are really excited to live in their own house. They have invested almost everything they had in this new house.
Mrs. Sharma has big dreams for the house. She has all the color combinations and furniture designs pre-decided. While Mr. Sharma has planned to hire the best architect for their house. But all these dreams are becoming a reality after cutting their leisure for the past 5 years. Also after saving every single penny they could in these past 5 years. Most probably this scenario will continue for a few more years as they have invested everything they had in their dream house.
Well, this case study seems to be familiar to most of the people around us. They are passionate people who work really hard to fulfill their dreams. All of us have a list of wants, actually a pretty expensive wish list to be checked in as little time as possible. But just hard work is not enough for these purchases. One needs to consider the tax-smart alternative to pay less by using tax planning.
So, before we see some ways to plan our taxes on home loan, let us first understand the concept of tax planning.
Tax planning is simply arranging your financial activities in such a way that maximum tax benefits are enjoyed. This can be done by making use of all beneficial provisions in the tax laws. It helps any person to take full advantage of all available exemptions, deductions, concessions, rebates, and reliefs within the boundaries of the law. Tax planning is important to avoid expensive tax blunders people make. It is also helpful in planning your financial transactions in a manner that you can legally reduce your taxes.
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The Income Tax Act, 1961 under various sections provides us the opportunity to plan our investment. Thus, you can claim various exemptions and deductions against the quantum of your tax liabilities. Now let us discuss a few of the most common tax planning tools with you which will assist you in optimizing your home loan.
Tax benefit on home loans
Home loan are highly advisable options for tax planning as one can claim a deduction in 3 different sections for the repayment of home loan. Thus resulting in huge tax savings. So to make it simple, let us understand this benefit by categorizing the repayment into two components. First is repayment of principal amount and second is repayment of interest on home loan.
The deduction for repayment of principal amount on home loans can be claimed under Section 80C of the Income Tax Act, 1961 up to ₹ 1,50,000. While the interest paid on home loan can be claimed under Section 24 of the Income Tax Act, 1961 up to ₹ 2,00,000. Also, an additional deduction of₹50,000 for interest on home loan can be claimed. First-time buyers can claim this additional deduction under Section 80EE of the Income Tax Act, 1961.
As Sharma’s were earning well, they could have invested their savings in some eligible funds and claim deductions thereof. Moreover, had they considered the option of a joint home loan, they both could have claimed deductions for payment of principal and interest amounts in respective sections as discussed above.
These smart choices would have given them the option to have their dream house much before, instead of making them wait for 5 years. Also, they could have even enjoyed their lives without sacrificing much in their leisure.
Tax planning is like a win-win situation for everyone. We, the taxpayers are able to plan our activities in such a manner that we attract minimum liability to tax by taking full advantage of tax laws. Our government also is at advantage as the exemptions and deductions that we get can be utilized only by making investments in various schemes initiated by the government. Finally, our nation will also prosper as the money invested by us in government schemes will help in the development of our country and those schemes will also generate employment in the nation. Thus, your simple step of tax planning is even helping our society to grow.
Tax planning is not something you do at the last moment before filing your tax return. Tax planning is much more than that last moment rush. It is a disciplined approach. One has to be smart enough from the beginning of the financial year to plan all the transactions considering the tax-smart choices so that you don’t end up paying more taxes than you have to!