Housing Finance and Tax Planning | Module D: Wealth Management

Additional Reading Material on Home Loans, Housing Finance and Tax Planning

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1. Home Loans Overview

Home loans are secured advances provided by financial institutions to individuals for the purchase, construction, renovation, or extension of residential properties. These loans are generally long-term, repayable over 10 to 30 years with fixed or floating interest rates.

Example:

Mr. Sharma takes a home loan of ₹50 lakhs at an interest rate of 8.5% p.a. for 20 years. The EMI will consist of both interest and principal components, and over time, the principal component increases while the interest component reduces.

2. Housing Finance and Tax Planning

Housing finance plays a dual role in meeting shelter needs and enabling tax planning. A borrower can optimize tax liability using tax deductions available under the Income Tax Act for both the interest and principal portions of the EMI.

Key Sections:

• Section 80C: Deduction up to ₹1.5 lakh per annum on principal repayment.
• Section 24(b): Deduction up to ₹2 lakh per annum on interest paid on home loan.
• Section 80EEA: Additional deduction up to ₹1.5 lakh for first-time home buyers under affordable housing schemes.

3. Tax Benefits in Respect of Housing Finance

Tax benefits differ based on property usage:

• For self-occupied properties: Interest deduction up to ₹2 lakh per annum under Section 24(b).
• For rented properties: Full interest deduction allowed.

Illustrative Example:

Ms. Priya has taken a home loan and pays ₹1.8 lakh in interest and ₹1.4 lakh as principal in FY 2024-25. She can claim deductions of ₹1.8 lakh under Section 24(b) and ₹1.4 lakh under Section 80C (subject to overall ₹1.5 lakh cap). This helps reduce taxable income significantly.

4. Mathematical Examples (Medium-Hard Level)

1. Calculate EMI for a home loan of ₹40,00,000 at 9% p.a. for 25 years.
   Formula: EMI = [P × r × (1 + r)ⁿ] / [(1 + r)ⁿ – 1]
   Answer: ₹33,585 approx.
2. If principal repaid in FY is ₹1,60,000, how much can be claimed under Section 80C?
   Answer: ₹1,50,000 (maximum limit under 80C)
3. Compute total tax deduction if interest paid is ₹1,90,000 and principal is ₹1,50,000.
   Answer: ₹1,90,000 under Section 24(b) + ₹1,50,000 under 80C = ₹3,40,000
4. Mr. A pays EMI of ₹25,000/month. If interest portion is 65% in first year, calculate annual interest.
   Answer: ₹25,000 × 12 × 0.65 = ₹1,95,000
5. Loan sanctioned on 1-April-2021, possession on 1-Dec-2023. Interest paid before possession is ₹3,00,000. Deductible amount?
   Answer: ₹60,000/year for 5 years starting FY 2023-24
6. If property is let out and interest paid is ₹3,50,000, how much can be claimed under Section 24(b)?
   Answer: Full ₹3,50,000 (no limit on let-out properties)
7. Home loan interest rate = 8.5% p.a., tenure = 15 years, loan amount = ₹30,00,000. Find total interest paid over term.
   Answer: Approx. ₹23,00,000 (based on amortization)
8. EMI = ₹20,000, interest paid = ₹1,80,000/year, tax rate = 30%. Calculate tax saved under Section 24(b).
   Answer: 30% of ₹1,80,000 = ₹54,000
9. Ms. Rina gets ₹2,20,000 in interest certificate from the bank. How much is deductible if property is self-occupied?
   Answer: ₹2,00,000 max deductible
10. First-time buyer, loan sanctioned in FY 2024-25, meets all conditions of 80EEA, interest paid = ₹2.4 lakh. How much total deduction on interest?
    Answer: ₹2,00,000 (Sec 24b) + ₹1,40,000 (80EEA) = ₹3,40,000

5. Multiple Choice Questions (MCQs)

1. Under Section 24(b), what is the maximum interest deduction for a self-occupied house?
   a) ₹1,50,000
   b) ₹2,00,000 ✅
   c) ₹1,00,000
   d) ₹2,50,000
2. Principal repayment on home loan qualifies under which section?
   a) 80D
   b) 80G
   c) 80C ✅
   d) 80E
3. If property is let out, interest deduction under Section 24(b) is:
   a) Limited to ₹2 lakh
   b) ₹1 lakh
   c) Full interest paid ✅
   d) Not allowed
4. Which section provides an additional deduction for first-time buyers under affordable housing?
   a) 80CCD
   b) 80EEA ✅
   c) 80CCF
   d) 80EEB
5. If EMI is ₹30,000/month, how much is paid in one year?
   a) ₹3,00,000
   b) ₹3,60,000 ✅
   c) ₹2,50,000
   d) ₹3,20,000
6. Deduction for pre-construction interest is allowed in:
   a) 2 installments
   b) 3 years
   c) 5 equal installments ✅
   d) Lump sum
7. Which of the following is NOT a condition for claiming 80EEA?
   a) Individual must be first-time home buyer
   b) Stamp duty value must exceed ₹45 lakh ✅
   c) Loan must be sanctioned during specified period
   d) Should not own any residential property earlier
8. Which of these qualifies for deduction under Section 80C?
   a) Interest on home loan
   b) Principal repayment ✅
   c) Rent received
   d) Capital gains
9. If total deduction claimed under Section 24(b) is ₹1,90,000, how much more can be claimed under 80EEA?
   a) ₹0
   b) ₹10,000
   c) ₹1,10,000
   d) ₹60,000 (if eligible and within limit) ✅
10. Housing loan interest deduction benefits the borrower by:
    a) Increasing loan burden
    b) Reducing taxable income ✅
    c) Increasing taxable income
    d) None of the above