If you are going in for property as an investment, you can actually use tax laws more effectively
Given the number of options available to take home loans, how do you make a smart decision? What does one need to be aware of while going in for a loan? Kanchana Dwarakanath of HappyKeys talked to Ajai Kesavan, a private banker and wealth management specialist.
You must set aside around 6-9 per cent of the Real Estates property’s purchase price towards stamp duty and registration (depending on the state you are buying). You need to have this as a separate saving.
The EMI you pay should not be more than 50- 60 per cent of your take-home salary. “Assume you have a Rs 80 lakh loan for 20 years. At today’s interest rates, you will have to pay 80,000 per month as EMI. Which means your take home needs to be nearly Rs 1.6 lakh for you to be able to afford this loan. Please take this in to account while budgeting for the amount that you’re going to take as loan,” says Kesavan.
Banks and housing finance companies typically charge a percentage of the loan amount as processing fee. This can be reduced if you negotiate well. Today, you can switch loans from one bank to another without paying any pre-closure charges.
“With the result, banks have become competitive about processing fees,” says Kesavan. Typically, you shouldn’t have to pay more than Rs 15,000 for a Rs 1 crore loan.
Apart from looking at the interest rate, one should also be aware of the ‘spread’ between the bank’s base rate and the rate being charged from you. In a changing interest rate scenario, it is this spread that will determine the rate that you will be paying.
For example, if the bank’s base rate is 9.40 per cent and you’re being charged 9.65 per cent, then the spread is 0.25 per cent or 25 basis points over the base rate. You need to look at the historical base rate of your bank and also the spread that they are offering you and make an informed decision.
The tax-loan connection
Did you know that from a tax perspective, the benefits available on the EMI can be separated on the lines of pre-construction and post-construction property?
If the property is being built, then you do not get any immediate benefit for the interest component you pay.
However, the total amount that is paid as interest in the pre-construction phase is accumulated and one-fifth can be claimed as deduction spread over the next five assessment years after construction.
If you are going in for property as an investment, you can actually use tax laws more effectively. A property that is not self-occupied is considered to be ‘deemed to be let out’ and in this case, the entire interest component (not just the stated Rs 2 lakh limit) can be offset against your income.
For example, say the loan is Rs 80 lakh for 20 years and the EMI is Rs 80,000. If you look at the amortization schedule for the initial years, a major portion of this is the interest component.
“Assuming the entire Rs 80,000 is interest then 80,000 multiplied by 12 can be offset against your income and can result in a tax-saving of nearly Rs. 2.8 lakh. This can be a huge advantage and can actually reduce the overall cost of your loan,” says Kesavan.
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