While buying a home of its own is a dream for many, it cannot be ignored that there is a lot of social pressure on the young earners at this time…

The good thing is that the government has given various tax concessions over the years to boost the real estate activity. These concessions coupled with easy availability of loans have made it easy for people to buy a home early in life.

For a young earner, buying a home is a huge commitment, which results in taking out loans and sacrificing a major part of the monthly income for Equated Monthly Investments (EMIs).

In today’s post, let us find out how a home loan can impact your tax planning and the proactive steps you can take to reduce the impact of home loan on your tax planning…

Action #1: Go through the provisions of the tax law so that you can claim full tax benefits:

Under the tax law, the following expenses are allowed to be deducted for home purchase and home loan under various provisions of the Income Tax Act:

If you have recently obtained a home loan, spend some time getting acquainted with the finer terms of the above provisions so that you can claim tax deduction correctly.

Because if you inadvertently claim an additional deduction on your tax return, which is not allowed by law, it can create substantial penalty effects. In case of doubt, it is better to consult a tax specialist.

Action #2: Modify Income Tax Declaration:

Suppose you buy a house after submitting the income tax declaration to your employer. In that case, you need to actively modify it to reflect the correct position.

You can do this by obtaining a provisional interest certificate from your home loan provider and update the amount of deduction under the relevant sections based on the details in the certificate.

This will substantially reduce the impact of TDS on your monthly salary and increase your take-home pay. This will allow more legroom to be further invested for your financial goals or for building a contingency fund.

Action #3: Do not claim HRA if you are claiming home loan deduction:

Once you occupy your new home, you cannot claim both the House Rent Allowance (HRA) and the home loan deduction. If your case is selected in the assessment, doing so could result in a penalty for tax evasion.

Your employer is required to update your tax declaration and ensure that you are not claiming both deductions simultaneously.

Even though both the deductions appear in Form 16, you can still correct this difference while filing your tax return. The only thing would be that you may have to pay some self-assessment tax at that time.

Action #4: Revisit existing tax planning investments:

Before buying a home, you may be investing in several other investment avenues to save tax. However, after getting a home loan, you need to rethink your tax planning strategy for two reasons:

• The amount available for investment may now be less than the monthly salary considering the EMI commitment.
• The principal portion of the home loan will be counted in the section 80C limit.

The actions you can take can be as follows:

• If liquidity is a constraint right now, put off some investments – for example, cancel a SIP in the ELSS fund you are investing in every month. You can resume them as your income grows in the coming years.
• Revisit your financial goals and preparedness for upcoming short-term goals. If some investments need to be sold, check the tax implications before selling them. Avoid taking loans from personal loans or credit cards.

Action #5: Explore tax saving avenues like NPS and ELSS:

Considering the cost of houses in Indian cities, the deduction you claim under Section 80C can help fill almost the entire 80C limit.

If you have surplus to invest, you can consider National Pension Scheme (NPS). It gives an additional deduction of ₹50,000 over and above 80C. However, be mindful of lock-in requirements.

It is also important to note that home loan EMI payment effectively means investing in “real estate” as an asset class.

So, if you have surplus investment, do not rush to pre-pay the loan. Better to diversify into another asset class – for example, invest in equities through ELSS mutual funds.

Unlike NPS, which is suitable only for retirement, small lock-in in ELSS can help in meeting medium term goals like education of children.