If you are in higher income tax slab, saving tax with a home loan on a let out property is a must
It starts to pinch harder when an increase in your income results in higher tax leakage as you move from 10% income tax slab to the 20% income tax slab or from a 20% income tax slab to the 30% income tax slab. Here you need to be more efficient with tax planning and optimize the saving from all tax saving avenues.
Self occupied property works well for 10% income tax slab: Till the time you are in 10% income tax bracket a home loan for self occupied property helps you save taxes immensely. You get Rs 2 lakh annual deduction on account of interest payment of home loan under section 24b. Besides this your principal repayment of home loan as it qualifies for section 80C deduction under which you can claim deduction maximum upto Rs 1.5 lakh in a given financial year. It is not unusual for a person falling in 10% income tax slab not able to utilise 100% limit of Rs 1.5 lakh under section 80 C each year through various tax savings investments. In such a case the principal repayment amount in the range of Rs 20000 to Rs 1 lakh for a home loan of around Rs 15 to Rs 30 lakh nicely fits in to cover the gap in exhausting the Rs 1.5 lakh annual limit under section 80 C and save the taxes.
Higher income necessitates better tax planning: Things start getting complex the moment your annual taxable income rises above Rs 5 lakh. However the moment your income rise and you go for a higher home loan amount and the EMI crosses Rs 30000 then you make payment above Rs 3.6 lakh a year which is above combined limit or section 80C and section 24b of Rs 3.5 lakh for a self occupied property. Most people in this stage discover that even after exhausting their section 80C limit and home loan interest limit they end up paying huge amount of tax. As your income goes higher from this level you feel helpless in saving taxes as you have already exhausted the limits.
A let out property helps indirectly in tax saving through section 80C: At higher income level you also face problem of section 80C being crowded out in a very inefficient way. Your EPF contribution goes higher, your life insurance contribution goes higher, beside this you do your investment in ELSS, ULIP, PPF, etc but all these go in vain as they do not provide any tax benefit under section 80C because your home loan principal repayment in a given financial year alone is more than section 80C limit of Rs 1.5 lakh. This is where section 24b provides you additional tax saving opportunity. First of all the annual interest payment during first half of your home loan tenure remain higher. If your property is a let out property then you get deduction on the entire interest amount which is in most of the cases more than the combined limit Rs 3.5 lakh of principal and interest payment for a self occupied house. So higher the loan amount higher would be annual interest outflow and higher will be the resulting tax saving. This also helps you do utilise your section 80C investment limit through your various tax saving investments.
So if you fall in a higher income tax slab then going for the option for a higher home loan for a let out property may be the best thing you can do to enhance your tax saving avenues.
Self occupied property works well for 10% income tax slab: Till the time you are in 10% income tax bracket a home loan for self occupied property helps you save taxes immensely. You get Rs 2 lakh annual deduction on account of interest payment of home loan under section 24b. Besides this your principal repayment of home loan as it qualifies for section 80C deduction under which you can claim deduction maximum upto Rs 1.5 lakh in a given financial year. It is not unusual for a person falling in 10% income tax slab not able to utilise 100% limit of Rs 1.5 lakh under section 80 C each year through various tax savings investments. In such a case the principal repayment amount in the range of Rs 20000 to Rs 1 lakh for a home loan of around Rs 15 to Rs 30 lakh nicely fits in to cover the gap in exhausting the Rs 1.5 lakh annual limit under section 80 C and save the taxes.
A let out property helps indirectly in tax saving through section 80C: At higher income level you also face problem of section 80C being crowded out in a very inefficient way. Your EPF contribution goes higher, your life insurance contribution goes higher, beside this you do your investment in ELSS, ULIP, PPF, etc but all these go in vain as they do not provide any tax benefit under section 80C because your home loan principal repayment in a given financial year alone is more than section 80C limit of Rs 1.5 lakh. This is where section 24b provides you additional tax saving opportunity. First of all the annual interest payment during first half of your home loan tenure remain higher. If your property is a let out property then you get deduction on the entire interest amount which is in most of the cases more than the combined limit Rs 3.5 lakh of principal and interest payment for a self occupied house. So higher the loan amount higher would be annual interest outflow and higher will be the resulting tax saving. This also helps you do utilise your section 80C investment limit through your various tax saving investments.
So if you fall in a higher income tax slab then going for the option for a higher home loan for a let out property may be the best thing you can do to enhance your tax saving avenues.
It is good option thi have a second house and let it out to save tax for higher tax bracket income provided you take a house loan.
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