No Comments

Importance of a CIBIL score for home loan

CIBIL score

Banks rely on credit bureaus to provide them with useful data to rate a borrower’s creditworthiness. Assigned through a score, this rating is more commonly known as a borrowers’ credit or CIBIL score in India.

Banks offer housing loans to prospective borrowers, based on their capability to repay the debt. Financial institutions ascertain the loan applicant’s creditworthiness by checking various data related to his/her financial history and the manner in which she/he may have dealt with debts, so far. Banks depend on credit bureaus to provide them with this data, which is more commonly known as a borrowers’ credit or CIBIL score.

What is a credit score?

Credit scores are assigned by credit bureaus to borrowers in India, based on the latter’s banking/payment history, on a scale of 300 to 900. Banks offer home loans easily to borrowers with credit scores of 700 and above. Borrowers with poor credit scores have to pay a higher interest rate.

What is CIBIL score?

Even though the term CIBIL score is considered synonymous with credit score, note here that CIBIL is one of the four credit bureau companies in India that provide credit information. The four companies are:

  1. TransUnion CIBIL
  2. Equifax
  3. Experian
  4. CRIF Highmark

Any of the four companies can provide your credit history. However, a credit score generated by TransUnion CIBIL is known as a CIBIL score.

What is a CIBIL score range?

Based on the credit history of the user, credit bureaus assign the following scores:

CIBIL score of 700+: A score above 700 is considered a no-risk zone for the financial institution. This means that the lender will be willing to offer you the loan, at their lowest interest rates. Note that 79% of loans are sanctioned to borrowers with a score higher than 750.

CIBIL score between 600 and 700: Lenders will also be willing to offer loans to a person with a score in this range, which is considered as a less-risky zone. You may, however, have to pay a higher interest than those with a better score.

CIBIL score of 300-600: A person with this credit score is considered to be in a risky zone. Banks shy away from funding people in this category.

CIBIL score 1-5: This credit score is assigned to people with less than six months of credit history.

-1 credit score: This credit score is assigned to people with no credit history. This rating is assigned to first-time borrowers with no loan or credit in their names.

Fee to get a credit report / CIBIL score check

While a borrower can check credit score for free from any credit information company once in a calendar year, under the rules prescribed by the Reserve Bank of India (RBI), credit bureaus might charge a nominal fee for the same. The borrower will always have to make a payment to get a credit report along with his credit score check.

To get more than one free credit score in a year along with the credit report, the borrower will be charged a fee as listed below by TransUnion CIBIL:

Basic credit report with credit score: Rs 550 (one report in a year)

Standard credit report: Rs 800 (two reports in a year)

Premium credit report: Rs 1,200 (four reports in a year)

Credit score vs CIBIL score

Owing to the wide popularity of TransUnion CIBIL in India, (TransUnion CIBIL was India’s first registered credit bureau company), credit scores are often referred to as CIBIL score.

Formed in 2000 by a group of financial institutions, CIBIL (Credit Information Bureau (India) Limited) was acquired by US-based TransUnion, earning the name TransUnion CIBIL.

How is CIBIL score calculated?

Credit bureaus arrive at credit score ratings, based on four prime factors. These include:

  • Repayment history
  • Existing loan and credit utilisation
  • Type of loan and tenure
  • Number of credit inquiries

While the first two parameters are invariably given the highest weightage when assigning a credit score (typically in the range of 30%-35%), different credit bureaus might give different weightages to each parameter.

How much time does it take to get a CIBIL report?

Your CIBIL report and score will be sent to your e-mail address within three to five working days, if you are applying online. In case you apply for a credit report offline, CIBIL will take a week to issue the credit report after verifying the documents.

How to check credit score?

  • To check CIBIL score and receive it in your mailbox, visit the CIBIL website, www.cibil.com.
  • Select a subscription from among basic, standard and premium.
  • Key in details such as your name, email address, ID proof, etc., to create an account.
  • Make the payment based on the subscription type.

Credit score for home loan

Almost all banks in India offer their best rates of interest to people with a credit score of over 750. This means that if a bank is currently charging, say, the lowest interest of 5.80% on its housing loan, it will offer this rate only to those with a credit score of over 750. Borrowers with lower scores will have to pay a higher rate of interest.

Is there a difference between credit ratings of different credit companies?

Since each company uses its own specific methodology to assign credit scores to individuals, using the same data provided by banks and financial institutions to each one of them, the rating assigned by one credit bureau to a borrower may be different from the score assigned by another credit bureau.

Nine assumptions that will harm a home buyer’s credit score

Banks and housing finance companies (HFCs) thoroughly examine the credit profile of the applicant, along with several other factors, before approving any home loan. This scrutiny by financial institutions is likely to grow more rigorous, if the defaults on home loan repayments increase, owing to the impact of the Coronavirus pandemic on individual incomes and businesses.

In a scenario like this, wrongly-held notions about your credit score could reduce the chances of buying your dream home, at a time when property prices in most big cities are at a low.

“Conversations with our customers over the years, have revealed some extremely grave myths they have about the credit score,” says Radhika Binani, chief product officer, Paisabazaar.com.

Here are some of the commonly-held, inaccurate beliefs pertaining to the credit score and its impact on your home loan borrowing capacity.

1. Staying off credit is good 

Thinking that banks will be impressed by the fact that you have never depended on credit to meet any of your financial needs, is ill-founded. In the total absence of a credit history, banks will have to go through a more rigorous scrutiny process, to figure out your credit-worthiness and repayment capacity. Hence, they will be more cautious, while examining your home loan application.

2. I can quickly improve my credit score

Since you know that the absence of a credit history is actually a bad idea, you may be tempted to quickly apply for credit cards and small loans, to create a history. This would be a bad idea, because such attempts make it obvious to the credit institutions that you are trying to hurriedly create a credit history, to get a huge loan subsequently. This would also reflect poorly on your credit score.

3. It is okay to touch the upper limit on your credit

Among the facts based on which your credit score is prepared, is how much of your available credit you are using. Your payment history, loan amount, length of credit history and credit mix, are other key factors.

Maxing out the credit limit sanctioned on credit cards, pushes up the credit utilization ratio (the ratio of your outstanding credit card balance to your credit card limit). In simple terms, credit utilization shows the amount of available credit a borrower is using. The lower the ratio, the better.

Suppose your balance is Rs 20,000 and your credit limit is Rs 50,000, the credit utilization for your credit card is 40%. Now, a move that increases your repayment obligations would hurt your credit score.

4. Being a guarantor to a loan is fine

A friend or a relative may have asked you to be a guarantor, in his loan application and you may have agreed, considering it to be a harmless request. However, this impacts your own credit worthiness in two ways:

  1. If the friend defaults on his loan, you are legally obliged to meet the liabilities.
  2. Your own borrowing limit might be constricted by the outstanding loans for which you are a guarantor.

5. My credit report is up-to-date

On full repayment of a loan, the bank, which lent the money to you, will provide you with a clearance report immediately. However, it may take around 30 to 60 days for this information to be shared with the credit bureaus, who actually prepare your credit score. The changes in your credit balance would reflect on your credit score, in due time and not immediately.

“Everyone needs to check and track their credit scores, at least once every three months, even if you do not need a loan in the foreseeable future. This is because crisis and uncertainty can strike anytime and you may need to take a loan,” says Binani. Credit reports may also contain wrong information, fed erroneously by the lender or due to clerical errors on the credit bureau’s part.

“These errors can adversely affect one’s credit score and thereby, his future credit card and loan eligibility. The only way to detect such errors, is to fetch the credit report at regular intervals and report inaccuracies, if any, to the bureaus for rectification,” she adds.

6. Delays are fine, as long as I pay the EMI

Credit bureaus do not assign ratings, only on the basis of whether or not you have been able to repay your loans. They are in fact more interested in gauging how diligently you do that job.

Delayed credit card payments and EMI defaults, will convince them of a lack of financial discipline on your part, even if you ultimately repay the loan. In fact, ratings are assigned based a variety of factors, and will be impacted in case the bureau finds out your  source of income is impacted in any manner or form. 

It is pertinent to mention here that credit bureaus slashed ratings of numerous borrowers who avail of the benefits of the government’s six-month loan moratorium, announced by the RBI in March 2020 in order to offer relief to consumers in the aftermath of the coronavirus pandemic.  While announcing the moratorium, the RBI had categorically said applying for the moratorium will not have any impact the credit rating of the beneficiaries.

See Also : Effect of Coronavirus on Indian Real Estate

7. I should close old accounts

As credit cards are considered unsecured loans, some of you may hurry to close an old account, with the notion that it would reflect positively on your credit score. This might, in fact, have the opposite effect on your credit rating. An old credit card account with a good repayment history, would help your prospects as a borrower.

Since credit bureaus also factor in the length of your credit history while assigning you a rating, an active old credit card account, would only be helpful towards building your credit worthiness.

8. Settled loans do not find a mention in my records

Each and every financial transaction has a mention in your credit history. These include the number of times you might have called a bank, to enquire about home loans or credit cards.

See Also : Home Construction Loans

9. A bad credit score is permanent

A bad credit report today could be completely turned into a good one by the borrower, by way of adopting financial discipline. Pay your bills on time, pay off your debt, do not apply for too much credit in a short span and check out your credit score regularly, to get any errors in your credit report corrected. By doing so, in good time, you can completely transform a bad credit score into a good one.

See Also : Lucky Plants For The House

How to improve your credit score for a home loan

By Content Consultants

Improving one’s credit score has many advantages. Not only does it make it easier to obtain a loan, but it can also help the applicant to get an attractive rate of interest

August 4, 2018: It is advisable for home loan seekers to obtain a credit report, before applying for a large loan, such as a home loan. This report, which provides a person’s credit score, can be obtained from any one of the four credit bureaus operating in the country – CIBIL, Experian, Equifax and Crif High Mark. A score between 750 and 900 is considered as excellent. However, if the score is below 675, one may need to improve the credit score before applying for a home loan.

See Also : Home Loan Income Tax Benefits

“A good credit score can help you get a loan at a more attractive rate of interest. This can lower your interest burden by lakhs of rupees, during a loan tenure of 15-20 years,” asserts Sujit Kumar, a Delhi NCR-based lawyer, who improved his credit score, before applying for a home loan.

Immediate tips to improve your credit score

When it comes to improving your credit score, first check for any error in your lender’s record books. While you may have repaid a loan, the bank’s records may still be showing some credit outstanding against your name. Rectifying such mistakes, will improve your credit score.

Disagreements between a lender and a borrower may also be the cause of a poor credit score. Resolving such disagreements, paying the dues and closing the loan account can boost your score.

The most important thing for a good credit score, is to make all the payments on time. If you have missed a particular payment, make amends right away by paying up.

Consolidating your credit will also help. You may have taken five personal loans. Consolidating all these loans, into a single one, will look better on your records, by indicating that you are not excessively credit-hungry.

Also, when it comes to credit card bills, many borrowers pay up only the minimum amount and revolve the rest of their credit card loan. This is a bad practice, as the rate of interest on credit card loans is very high. If you have been doing so, replace the credit card loan with a personal loan, which will bring down your interest charges and enable you to meet your dues.

See Also : You should know about National Generic Document Registration System (NGDRS)

Long-term tips to improve your credit score

In case you have a delinquent loan against your name and you don’t have the ability to repay right away; this is a situation that can only be remedied over a period of time. If you have a high proportion of unsecured loans, vis-à-vis secured loans, you should try to alter the mix over a period of time.

Another behavioural change that you must make, is to avoid shopping for loans excessively. In trying to bag the best possible deal, do not apply or make enquiries at 15-20 banks. Each time you make an enquiry, it gets registered against your name and indicates that you are credit-hungry.

Arun Ramamurthy, director, Credit Sudhaar Services stated that if a person is too hungry for credit, it reflects poorly on his credit score.

Suppose that your credit card provides you with a credit limit up to Rs 2 lakh, don’t use up the entire limit as this is also perceived as a sign of credit hunger.

Despite your best efforts, if you are not able to achieve a good credit score on your own, then, there are professional agencies that you can turn to, such as Credit Sudhaar, etc. These agencies can help you to achieve the right mix of secured and unsecured loans.

They tell you about the right number of credit cards you should own, given your economic status. They also inform you about the maximum percentage of credit on your credit card, beyond which you should not go.

See Also : Claim for Tax Benefits on Joint Home Loans

2 Comments

Home Construction Loans

home construction loans
Here is everything you need to know about construction loans in India

Among the various products that banks offer, to cater to the varying needs of property buyers and owners, are home construction loans. Even though there might be some similarities between a construction loan and a home loan, the two should not be confused to be the same, considering they are inherently different financial products.

What is a construction loan?

A construction loan is money that you borrow to build a residential property on a piece of land or plot. It is different from a plot loan in the sense that a construction loan facilitates the constitution of a building and not the purchase of the plot.

It is also different from a home loan, which is borrowed to purchase an apartment or a flat. Even if the property you have invested in is an under-construction one, the home buyers take a home loan and not a construction loan from the bank; it is your builder who must have taken a construction loan to build the project.

Documents needed for construction loan

Depending on the bank from which you are taking the loan, you may have to submit certain documents. Even though this is not an exhaustive list, the borrower has to submit some or all of these documents, along with the loan application, to get a construction loan:

  • Age proof
  • Income proof
  • PAN card details
  • Address proof
  • Property / land-related documents
  • Estimated construction cost quotation.

Key features of construction loan

A key feature of construction loans is that they are not disbursed in one go, like home loans or plot loans. The bank disburses the construction in tranches, depending upon the progress of work.

A construction loan only covers the structural makeup of the property building. This means, your loan will not cover the cost involved in improving the interiors of the property.

Borrowers must also bear in mind that banks typically fund a certain percentage of the construction cost as construction loan. Private lender Axis bank, for example, offers 80% of the estimated construction amount as the loan.

See Also Home Loan Income Tax Benefits

Best construction loan products

All leading banks in India provide construction loans at attractive interest rates. India’s largest lender SBI.

For example, offers construction loans through its SBI Realty product. This product allows the borrower to build the unit within five years from the date the loan has been sanctioned. The maximum amount of loan that can be offered to a customer can range up to Rs 15 crores, with a comfortable repayment tenure of 10 years.

Home construction loan interest rate and processing fee

Mentioned below are the current rates of interest on construction loan products of leading banks:

BankInterest rate per annumProcessing fees
HDFC6.90%-7.55%0.50% of the loan amount + tax
SBI7.70%-7.90%0.4% of the loan amount + tax
ICICI Bank7.20%-8.20%0.50% of the loan amount + tax
Punjab National Bank7.50%-8.80%0.30% of the loan amount + tax
Axis Bank8.55% onwards1% of the loan amount + tax
Canara Bank6.95% onwards0.50% of the loan amount + tax
Bank of India6.55% onwards0.25% of the loan amount + tax

How to apply for construction loans?

Borrowers can visit a branch or apply for the loan online, through the official portal of the bank concerned.

Construction loan tax benefits

Just like home loans, borrowers can avail of tax deductions on payment of interest and principal on the construction loan, under Section 80C and Section 24. However, even if the loan is taken to build your first home, you will not be able to claim benefits under Section 80EE and Section 80EEA, as these apply only in case of ‘acquisition of a residential property’. This means that you cannot claim deduction if you have bought a plot and plan to build your first home on it with the help of housing finance.

See Also Claim for Tax Benefits on Joint Home Loans

FAQs

Can I get tax benefits on plot loans?

Plot loans do not have tax benefits like home loans.

Are home loans different from construction loans?

Home loans are offered for the purchase of a property while construction loans are offered to build a property on a piece of land.

How is a plot loan different from a construction loans?

A plot loan is used for buying a piece of land which can be developed later for the residential purposes. A construction loan on the other hand is offered to build a property on a piece of land.

1 Comment

Home Loan Income Tax Benefits

tax benefits
The government offers various tax rebates, especially if the property has been purchased using a home loan, to make property purchases more lucrative for home buyers/investors. In this article, we will discuss at length the various tax rebates that a home loan borrower can enjoy

Tax Benefits: Along with property ownership comes the responsibility to pay taxes. This is why an individual’s income from house property is taxed, based on its potential to earn a particular amount as rent, even if the unit is lying vacant.

However, to make property purchases more lucrative, the government offers various tax benefits, especially if the property has been purchased using a home loan. In this article, we will discuss at length the various tax rebates that a home loan borrower can enjoy.

Deductions allowed on home loan principal Section 80C Deduction

Available for: Property construction, property purchase

Can be claimed for:  Self-occupied, rented, deemed-to-be-rented properties

Through Section 80C, nearly a dozen investment/expenditures, including payments made towards provident fund, public provident fund, life insurance policies, home loan principal, stamp duty-registration charge on property purchase, etc., have been made tax free.

However, a tax payer can only claim up to Rs 1.50 lakhs in a year as deduction under Section 80C.

In light of the fact that our first tax-saving preferences are investment assets such as PF, PPF and life insurance policies at the start of our working careers, a middle-class tax payer typically exhausts this rebate limit much before they actually invest in a property.

Even if that is not the case and there is some scope for the tax payer to claim benefits towards home loan principal payment, it would be quite limited.

For example: If you are depositing 50,000/- a year in your PPF account (the upper limit here is Rs 1.50 lakhs a year) and pay another 50,000/- as you insurance policy premium (the minimum premium is 20,000 Rs. per annum).

You can only claim 50,000/- from your home loan interest payments under Section 80C, even if the annual outgo if much higher.

This is why there has been a long-standing demand that the deduction limit under Section 80C be increased, in order to justify the vast number of investment/expenditures it covers.

Read Also Info about Plot Loans

Terms and conditions for home buyers to avail of benefits under Section 80C
1. If you have taken loan to build a home, the construction work should be completed within 5 years of taking the home loan.
2. The house should not be sold within 5 years of possession. In case that happens, any deductions that you have claimed will be added back to your income and taxed accordingly, in the assessment year in which the sale takes place.
3. Deductions under Section 80C are offered on the payment basis – deductions can only be claimed on the actual amount the borrower pays in a year.

How to maximize tax rebate under Section 80C?

If a property is jointly owned, each co-borrower can claim Rs 1.50 lakhs as tax deduction on their respective incomes under Section 80C. For spouses to claim that benefit, they have to be co-owners, as well as co-borrowers.

Home loan tax rebate

Home buyers enjoy income tax benefits on both, the principal and interest component of the home loan under various sections of the Income Tax Act 1961.

Tax deductions allowed on home loan principal + stamp duty registration charge
Relevant Section/s in the income tax lawSection 80C
Upper limit on tax rebateRs 1.50 lakhs per annum
Upper limit on tax rebate for senior citizensRs 2 lakhs per annum
Tax deductions allowed on home loan interest
Relevant Section/s in the income tax lawSection 24, Section 80EE, Section 80EEA
Upper limit on tax rebateUp to Rs 3.50 lakhs per annum
Upper limit on tax rebate for senior citizensUp to Rs 4.50 lakhs per annum

Deductions under Section 24

Available for: Property construction, property purchase

Can be claimed for:  Self-occupied, rented, deemed-to-be-rented properties

Section 24 allows home buyers deductions of up to 2 lakhs in a year towards interest payment. This cap, however, is only for self-occupied properties. If the property has been given on rent or falls under the category of deemed to be let out, the entire interest amount paid is waived off as a deduction. In this, however, the tax payers can only offset losses of up to 2 lakhs under the head income from housing property in a year.

In case, the loan money is to be used for the construction or purchase of a new property, the borrower can claim 2 lakhs Rs as deduction on pre-construction interest in a year, in five equal installments at the start of the year in which the property is constructed or purchased.

Terms and conditions for home buyers to avail of benefits under Section 24
1. If you have taken a loan to build a home, the construction work should be completed within 5 years of taking the home loan.
2. The deduction is capped at Rs 30,000, if the house is not constructed within 5 years of taking the loan. This period starts from the end of the financial year in which the loan is borrowed.
3. The deduction can be claimed from the year in which the construction is completed.
4. The loan should have been taken after April 1, 1999.
5. A certificate from the bank about the interest calculation is required, to claim the benefit.
6. Deductions under Section 24 are offered on accrual basis – interest is calculated for each year separately and the rebate can be claimed even if no actual payment is made.

Deductions allowed on home loan interest

Home loan interest deduction repayment are offered under various sections of the income tax law.

Deduction under Section 24 is also available to buyers who do not use home loan

Section 24 also allows buyers to avail of deductions, even if the buyer has used fund from his own sources to make the purchase, without seeking any home loan. Under the section, a flat 30% deduction on the net annual value of a property is available to the owner, if the house is purchased entirely using the buyer’s personal funds. However, this rebate will not be available if the property is self-occupied, since such properties do n0t have any net annual value under the existing tax laws.

Deductions under Section 80EE

Available for: Property purchase

Can be claimed for:  Self-occupied, rented, deemed-to-be-rented properties

Section 80EE was introduced in financial year 2013-15 for two years, with an aim to make home ownership more lucrative for first-time home buyers, by offering rebate over and above the deductions under Section 80C and Section 24. At the time of its introduction, the deduction limit under this section was capped at Rs 1 lakh. However, when it was reintroduced for the financial year 2016-17, the rebate limit was capped at 50,000 Rs per annum.

Terms and conditions for home buyers to avail of benefits under Section 80EE
1. The purchaser must be a first-time home buyer.
2. The property value must not exceed Rs 50 lakhs and the loan value should be up to Rs 35 lakhs.
3. Deductions can only be claimed if the loan is borrowed from a financial institution. Rebate is not applicable if the loan is borrowed from family members or friends.
4. Tax payer can claim the rebate under Section 80EE only after exhausting the waiver provided under Section 24.

How to maximize tax benefits under Section 80EE?

This benefit is no longer available to those applying for new home loans. However, borrowers who took the loan during the period when Section 80EE was applicable, can continue to claim higher benefits for their entire tenure. Since Section 80EE does not specify that the property must be self-occupied to claim the rebate, you can also claim the rebate on your rented or deemed to be let out property.

How to maximize tax rebate under Section 24?

If a property is jointly owned, each co-borrower can claim Rs 2 lakhs as tax deduction on their respective incomes under Section 80C. In this case also, all the owners have to be co-borrowers.

They must also note that if they have paid more than Rs 2 lakhs as interest in a year, they have the option to carry the additional expense forward for another three years, to set off the losses. This option is available to only those property owners who are generating income from the house property.

Deductions under Section 80EEA

Available for: Property purchase

Can be claimed for: Self-occupied, rented, deemed-to-be-rented properties

The then finance minister Piyush Goyal introduced Section 80EEA in the interim budget of 2019, with an aim to make home ownership more lucrative for the first-time buyer, by way of offering an additional deduction of Rs 1.50 lakhs in a year. Benefits under Section 80EEA were extended for another year during the Budget 2020 (up to March 2021).

Benefits under Section 80EEA are over and above the ones offered under Section 80C and Section 24. Since the section doesn’t specify the point, it is understood that the benefits under are available for residents, as well as non-residents.

Read Also Claim for Tax Benefits on Joint Home Loans

Terms and conditions for home buyers to avail of benefits under Section 80EEA
1. Deduction is available only to individuals who are first-time buyers.
2. Only those buyers can claim benefits under Section 80EEA who are not claiming deductions under Section 80EE.
3. Property values should not exceed Rs 45 lakhs.
4. Carpet area of the unit is limited to 60 sq metres in mega cities and 90 sq metres in other cities.
5. The loan should have been taken from a bank or housing finance company and not from friends or family members.

How to maximize tax benefits using Section 80EEA?

First-time buyers of affordable property can claim Rs 3.50 lakhs as interest deduction, by combining the benefits under Section 24 and Section 80EEA. It’s better if the property is jointly owned, the co-borrowers can individually claim Rs 3.50 lakhs per annum as tax benefit. Also, since Section 80EEA does not specify that the property must be self-occupied, you can claim the rebate on your rented or deemed-to-be-let-out property.

Read Also Real Estate Brokerage

How much home loan can you get at your current salary?

Monthly salaryLoan amount you are eligible forLoan tenureLoan interestEMI you will pay
Rs 10,000Rs 4,78,217208%Rs 4,000
Rs 15,000Rs 7,17,326208%Rs 6,000
Rs 20,000Rs 9,56,434208%Rs 8,000
Rs 25,000Rs 11,95,543208%Rs 10,000
Rs 30,000Rs 16,13,983208%Rs 13,500
Rs 35,000Rs 18,82,980208%Rs 15,750
Rs 40,000Rs 21,51,977208%Rs 18,000
Rs 45,000Rs 25,20,976208%Rs 20,250
Rs 50,000Rs 26,89,972208%Rs 22,500
Rs 55,000Rs 32,87,743208%Rs 27,500
Rs 60,000Rs 35,86,629208%Rs 30,000
Rs 65,000Rs 38,85,514208%Rs 32,500
Rs 70,000Rs 41,84,400208%Rs 35,000
Rs 75,000Rs 44,83,286208%Rs 37,500
Rs 80,000Rs 47,82,172208%Rs 40,000
Rs 85,000Rs 50,81,057208%Rs 42,500
Rs 90,000Rs 53,79,943208%Rs 45,000
Rs 95,000Rs 56,78,829208%Rs 47,500
Rs 1,00,000Rs 59,77,715208%Rs 50,000

FAQs on home loan tax benefit

If I buy a property jointly with my wife, can we both claim tax benefits?

Both, the husband and wife, can separately claim deductions of Rs 1.50 lakhs under Section 80C and Rs 2 lakhs under Section 24 while filing taxes, as long as they are co-borrowers as well as co-owners of the property.

Can I claim tax benefits if I borrow money from family members or friends?

In such a case, deductions can only be claimed towards the interest component under Section 24. The person from whom you borrow the capital, would also be obliged to issue you an interest certificate, based on which your deduction claim would be accepted. The lender’s interest income would also be taxed, based on this document.

How much tax benefit can I get on home loan?

Tax deduction on the principal component is limited to Rs 1.50 lakhs per annum under Section 80C, while rebate towards interest is capped at Rs 2 lakhs. Additional tax benefits are also offered to first-time home buyers under Section 80EE and Section 80EEA.

Can I claim tax benefits if I borrow money from family members or friends?

In such a case, deductions can only be claimed towards the interest component under Section 24. The person from whom you borrow the capital, would also be obliged to issue you an interest certificate, based on which your deduction claim would be accepted. The lender’s interest income would also be taxed, based on this document.

Can I claim tax benefit on stamp duty and registration charge on property purchase?

Deductions can be claimed under Section 80C of the Income Tax Act on stamp duty and registration charge paid on home purchase, under the overall limit of Rs 1.50 lakhs per annum. This claim can, however, be made only in the year when the property was purchased.

My wife and I are co-borrowers and co-owners of a property, but I pay 70% of the EMI. In what proportion can we claim tax deductions while filing income tax returns?

The tax break is shared by each party in proportion to his contribution towards the EMI repayment.

Can I claim home loan tax benefit along with HRA?

A tax payer can claim home loan tax benefits along with house rent allowance in two scenarios. A: he is paying EMI for an under-construction project. B: he is living in a rented accommodation while his own property is also let out. In the latter scenario, his income from house property would be taxable.

How can I calculate tax benefit on home loan?

Almost all banks offer online calculators that help borrowers arrive at the amount they can claim as income tax rebate. You will have to key in details such as loan amount, loan tenure, interest rate, annual income, etc., while using the online calculator.

Can I claim tax benefits on two home loans?

Yes, you claim deductions on two home loans within the specific limit under Section 24 (Rs 2 lakhs per annum) if the properties are self-occupied. Only for your first home, you can claim benefits under either under Section 80EE or 80EEA. For your second home, no deduction is available on the principal payment.

What are the exclusive tax benefits for first-time home buyers?

Only first-time buyers can claim deductions under Section 80EE and Section 80EEA. This helps them make their combined deductions as high as Rs 5 lakhs per annum. The benefit will double, if the property is jointly owned.

What is an interest certificate?

Your lender issues you a certificate each year, specifying the amount you pay every year as principal and interest component of the loan home. The tax payer has to submit this certificate, to claim deductions.

1 Comment

Claim for Tax Benefits on Joint Home Loans

Home loans
While many home buyers opt for joint home loans to enhance their eligibility, the repayment of the loan and claiming of tax benefits on such loans has to be done in a particular ratio. 

The tax laws allow you to avail certain benefits with respect to respect home loans. The benefits are available under Section 24(b) for interest paid. And under Section 80C for the principal repayment, subject to certain conditions. Couples usually opt for a joint home loan, as this can enhance their home loan eligibility. However, there is considerable confusion, about who can claim the home loan benefit and how much tax benefit one can claim, with respect to joint home loans.

Co-borrowers vs co-owners 

Section 26 of the Income Tax Act, gives clear-cut guidelines, for taxation of your share in the jointly owned property. In case of a joint ownership of any house property, you are taxed as an individual with respect to your share in the property. So, if your share in the joint property is certain or ascertainable, you cannot be taxed as a Body of Individual (BOI) or Association of persons (AOP).

A basic condition for claiming tax benefits, is that you should be a co-borrower of the loan & a joint owner of the property. Unless you satisfy this basic condition, you cannot claim the tax benefits on the home loan.

In cases, a person merely joins another immediate family member, to enhance the loan amount eligibility. Without having any share in the property purchased. In such cases, the co-borrower, who is not a joint owner of the property, can’t claim the tax benefits on such home loans. This is one of the reasons that you should buy the property in joint names and then, individually claim the tax benefits.

Determining your share in a home loans 

Your share in the property is fixed at the time of purchase of the property. May be by way of contribution towards down payment, as well as your share in the home loans. It may also happen that you may be a joint owner of the property. And a co-borrower in the home loan application, even when you may have fully paid for your share in the property by way of the down payment.

It may so happen that your share in the property, may not be defined in the agreement for purchase of the house. And our share in the home loan is also not mentioned in the loan sanction letter or the home loan certificate issued by the lender.

The share in the house property can be presumed to be equal, unless there are other circumstances to warrant otherwise.

The share in the home loan can be ascertained, from the payments made by each of the joint owners. It is always advisable to prepare a Memorandum of Understanding, which need not be stamped. To clearly define the respective shares of each of the joint owners in the property. So as to avoid any problem in the future. The details of payments made by each of the joint owner may also be mentioned in the memorandum of understanding.

In case a home loan is taken for buying the property, the ratio of each borrower in the home loan, can be inferred from the share in the property and payments made. Your share in the home loan may not necessarily be in the same ratio as your ownership of the house property.

As the share in the home loan is crystallized at the time of purchase of the property, the home loan should be serviced in the ratio arrived at the time of the purchase. This share in the property cannot fluctuate year after year and remains fixed. Therefore, you cannot change the pattern of servicing your home loan, any time you wish to do so.

As most people are unaware about this, they resort to changes in the pattern of servicing the loan. when one of the co-borrowers loses his/her job or takes a long leave due to pregnancy or study leave. However, this is wrong. In order to avoid any issues with the tax authorities, one should not change the pattern of servicing the home loan. Once is it fixed. In case of a cash crunch, other co-borrowers can temporarily lend/gift money. So that the ratio of servicing of the home loans are maintained throughout the tenure. According to the share in the home loans.

Read Also Zurich AG submits mater plan to NIAL for Jewar Airport

Home loan co-applicant declaration form for income tax

For both parties to claim the tax benefits, each party will have to submit a detailed document specifying the same. This document could be procured from the bank branch, to avail of the tax benefits.

Make sure that all the joint owners are not claiming tax benefits on the same amount of interest or principal payments. Tax payers who want to claim tax deductions, must get a (NOC) from other members. Clarifying that they would not claim any tax benefits on that specific amount. They would also have to mention the percentage of the interest. And principal payment that may be availed the tax payer who is applying for deductions.

Read Also Registration of Land & Property online in India

Claiming ratio of tax exemptions 

It may also happen that you may be a joint owner. And the co-borrower but are not servicing the home loan. In such a situation, you cannot claim the tax benefits on the home loan. As the tax benefits are available with respect to the amounts paid by you.

For one self-occupied property, you can claim interest benefits upto a limit of Rs 2 lakhs. In case of each of the joint owners. For home loan repayment, each co-borrower can claim tax benefits under Section 80C, upto Rs 1.50 lakhs every year. Together with other eligible items. So, you will get the tax benefits on the home loan, in the ratio in which you are servicing the home loan.

Tips for home loan co-applicants

  1. In the best interest of all parties concerned. It should be proper clarity on the contribution made by each party in the transaction. This leaves no scope for any disputes, in future. If the property were to be divided between two parties, no contention will arise with regard to the share-wise division.
  2. The home loan document should also clearly state which party will be responsible for paying the EMIs. It should also specify the share of such a co-borrower.
  3. Banks offer joint home loans to people with specific relationship. Before you plan to apply for a joint home loan with a, say, sister, please find out. If the bank will be willing to offer such a joint home loan to you.

FAQs

How to claim tax benefits on joint home loans?

For home loan repayment, each co-borrower can claim tax benefits under Section 80C.

Is it mandatory for a co-borrower to be a co-owner for claiming tax benefit?

A basic condition for claiming tax benefits, is that you should be a co-borrower of the loan, as well as a joint owner of the property. Unless you satisfy this basic condition, you cannot claim the tax benefits on the home loan.

How to determine your share in a home loan?

Your share in the property is fixed at the time of purchase of the property. Read more to know the details.