CIBIL (Credit Information Bureau of India Limited) founded in August 2000 keeps a credit score (called as Transunion Score) of all the people opting for any type of loan from any financial institution. CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders on a monthly basis. This information is then used to create Credit Information Reports (CIRs) and credit scores which are provided to lenders in order to help evaluate and approve loan applications. Credit Information Bureau (India) Limited (CIBIL) provides a credit score on a scale of 300 to 900 based on your previous credit card usage, how you maintained your bank accounts, any cheque bounces, existing loans, loan repayments and how many times you have applied for a loan or a credit card. The data from banks indicates that loan providers prefer a credit score which is greater than 700. Transunion score is a history of your credit profile, so do make sure that you manage your credit in such a manner that your score stays above 700.

It ranges from 5 years to 30 years. While deciding on the loan tenure, certain factors need to be considered. The most important factor (MIF) in deciding home loan tenure is net disposable income. Net disposable income is the money that you are left with after paying for all the deductions like PF, ESI, Gratuity and Taxes. From this net disposable income the EMI is served every month. If you have a low net disposable income, long loan tenures may suit you fine. But be aware in such a case, though the EMI would reduce, you would be paying interest for a longer period of time. A loan with a shorter tenure would bring with it payment of lesser interest, but of course a higher EMI. Also while deciding tenure things which should be kept in mind are stability of Job, chances of promotion or increment, continuity of income, etc.

There are two models of interest rate in the market. One is fixed interest rate concept where the rate of interest and EMI remains same for the complete tenure of the loan or till the time loan account is closed whichever is earlier. The second and most common type of concept is floating interest rate home loan. In such home loans, the interest rate and tenure of EMI is dependent on the base rate of the lender. As the base rate changes the home loan interest rate and tenure also changes. Fixed rate home loan are beneficial when the interest rates are expected to rise in the near future and floating rate home loans are beneficial when interest rates are expected to fall in near future.

Home Loan is one of the most widely used loan product in our country. Maximum housing units sold in the country are mortgaged with the home finance companies and banks. Due to acute shortage of housing in the country (some studies put figure at around 8-9 Crore Units) government has been very forthcoming in providing income tax benefits and rebates for home loans to increase the affordability of the individual house buyer and thus boost the demand. Home Loan tax benefits are the most widely used tax benefits in the income tax returns of individual tax payers in our country. Maximum people in the country are well versed with the basic benefits of home loan like interest deduction upto Rs 2 Lacs and rebate under section 80C for principal repayment upto 1.5 Lacs. In today’s discussion we will dig a bit deeper in the eligible exemptions, benefits and rebates for home loan cases. During my CA education and after that in last 15 years I always felt that its “Angel” and not “Devil” which is there in the details. Interest: Every Individual taking a home loan for Self- occupied property can claim deduction under Section 24 for an amount upto Rs 2 Lac and Upto Rs 50 thousand under newly introduced section 80EE effective from 01st April 2016 for first time home buyers (If certain conditions are fulfilled). Before discussing any further we should first understand what is interest? As we are claiming deduction under income tax act, definition of “Interest” as per Section 2 of Income Tax Act 1961 will be applicable. As per Section 2 (28A) of IT Act 1961, “Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. Section 24(b) of IT Act 1961 says that deductions will be allowed from income from house property “where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital”. The explanation to section 24 says that “Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal instalments for the said previous year and for each of the four immediately succeeding previous years:” Things to remember in simple words: 1. Interest not only means interest paid on home loan but incudes processing fees, administrative charges, CERSAI charges, and other expenses charged by financial institutions and banks to process your home loan application. So don’t forget to claim deduction for all these expenses along with interest paid or payable on your home loan while filling your return. Deduction is available for purchase or construction or repair & reconstruction or renewal of the house. 2. Section 24 clearly says “Interest Payable” meaning that even in cases where EMI or interest is not paid due to any reason, you can still claim deduction for interest from income from house property under section 24. Event of actual payment is not linked to the claiming of deduction. Deduction is allowed on accrual basis every year and not on the payment basis. 3. IT Act 1961, allows benefit of Rs 2 lac of interest paid on home loan for self -occupied property through section 24 (Deductions from Income from House property). Assesse while filling the return can put the annual value of self -occupied property as zero and then deduct the interest from this annual value. This loss so created in income from house property due to deduction of interest can thereafter be adjusted with the income from other heads like salary or business and profession. 4. As per the Finance bill 2016, effective 1 April 2016, deduction under Section 80EE has been reintroduced for an amount up to Rs 50 thousand over and above the existing benefits of section 24 and section 80C provided that the A. Property so purchased should have value of less than Rs 50 Lacs and Home loan should be less than Rs 35 Lacs. B. The Loan should be approved after 1st April 2016 but before 31st march 2017 and transaction of property should take place after 01st April 2016. C. The Buyer should be buying his or her first property. D. The deduction is not only for specific year but will continue for whole period till the home loan is repaid or prepaid. 5. All interest deductions mentioned in section 24 and section 80EE are given to person or persons individually and not on the property as whole. This means that for one property there can be two or more than two joint owners and borrowers and each of them will be eligible for the deductions singularly. 6. One important aspect as per the explanation of section 24 is that all interest paid or payable till the completion and possession of the housing unit can be kept as assets in the books of assesse and claimed as deduction in five equal yearly installments staring from the financial year in which the construction is completed over and above the interest paid for current year but within the overall limit of Rs 2 lacs. This is allowed only in cases where property is purchased or constructed and is acquired or constructed within a period of 3 years from the end of financial year in which loan was taken. In cases of repair or renewal this deduction of pre-construction period interest is not available. Also in the year in which the construction is completed or property is acquired by the buyer, whole interest paid or payable for that particular financial year before and after completion can be claimed under section 24 in that year itself though within the limit of Rs 2 lacs. For Example: “A” buys under construction Flat on 01st April 2014 and the flat is completed on 30th June 2016. “A” is paying interest on the home loan taken to buy this property from 01st April 2014 till 30th June 2016 and EMI started from 1st July 2016 when property was completed and handed over to the buyer. In this specific case all interest paid or payable for period 1-4-2016 to 31-3-2017 can be claimed as full deduction from income from house property under section24 within the overall limit of Rs 2 lacs. The interest paid for the period 1-4-2014 to 31-3-2016 can be claimed in 5 equal installments starting from the period 1-4-2016 to 31-3-2017. 7. One more important explanation of Section 24 is that all the deductions under this section will be allowed only in cases where the borrower/assesse is able to produce certificate from the home loan provider stating all details of loan given and interest paid or payable thereon. Without this certificate assesse is not eligible for deduction under section24 and 80EE. So all individuals taking home loan must ensure that at the end of every financial year they receive such certificate from their financial institution or bank. Also assesse should match the figures of interest paid according to them and as per the certificate. The amount mentioned in certificate is only eligible for deduction and not the amount as calculated by the assesse. 8. All the provisions mentioned above are applicable for self-occupied property only. In case the home loan is taken for the property which is rented out or deemed to be rented out, there is no limit of 2 lacs and complete interest paid can be claimed as deduction along with 30% standard deduction from the net annual value of the property (Net Annual value is the value of rental after deduction of property taxes levied by local authorities). The interest deduction can be claimed in both the cases where the property is actually let out and in the case where property is vacant but a reasonable amount of annual value can be calculated deeming the property as let out. This income or loss so calculated from the actual rented out property and deemed rented out property can be adjusted with other income heads of the assess like salary or business income or professional income or income from other sources. So in cases where the interest paid or payable on home loan is more than the rent received or deemed annual value, in such cases one can save lot of taxes by this cross head adjustment. This deduction is not limited to number of properties. 9. One must remember that property proposed to be acquired or constructed is not acquired or completed within a period of 5 years from the end of the financial year in which loan was taken, the deduction eligible amount would reduce from 2 lacs to 30 thousand only. Earlier this time period limit was 3 but was increased to 5 years from current financial year. This time period limit is only applicable for properties which are proposed to be self-occupied and is not applicable for properties which will be used for renting purposes. This means that whole interest paid or payable will be allowed as deduction irrespective of their period of construction or completion in case the subject property is rented out or deemed to be rented out. 10. The loss calculated from the income from house property due to deduction of local taxes and interest paid on home loan can be adjusted with other income heads in the current financial year and in case the income in other heads is not sufficient to adjust this loss then this loss can be forwarded for adjustment in later years but not more than 8 years from the current assessment year. 11. One advice I will give to every home buyer and home loan borrower is that in case the property you are buying is large in value and interest outgo on the property will be more than Rs 2 lacs, then buy this property in joint name with your parents or spouse or siblings. As Co-owners and Co-borrowers each person will be eligible for this deduction in the ratio of their ownership up to the limit of Rs 2 lacs and Rs 50 thousand as applicable. In today’s article we have kept our focus only on the interest part of the home loan and benefits of the same in income tax calculation. In the second part of this article we will dig deeper into the principal part of the of the home loan and benefits accruing from its repayment in income tax calculations. Don’t be afraid to take the home loan. In case you have stable job or business and your spouse is also earning, buy the property with home loan in joint name, enjoy the huge tax breaks that comes with it, be the king or queen of your home and not just a mere tenant. We all have 30-40 years of peak income earning life period and this period should be utilized properly to Create assets and value for the future life. Taking loan is not wrong or harmful, but is very useful and creates huge value in the long term if planned and taken properly. Do take advice from a professional wealth planner before you take decisive action in this regard. Written By Hitesh Dhanuka Chartered Accountant Director, Dhanuka Group

1. What is CIBIL? : CIBIL (Credit Information Bureau of India Limited) founded in August 2000 keeps a credit score (called as Transunion Score) of all the people opting for any type of loan from any financial institution. CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders on a monthly basis. This information is then used to create Credit Information Reports (CIRs) and credit scores which are provided to lenders in order to help evaluate and approve loan applications. Credit Information Bureau (India) Limited (CIBIL) provides a credit score on a scale of 300 to 900 based on your previous credit card usage, how you maintained your bank accounts, any cheque bounces, existing loans, loan repayments and how many times you have applied for a loan or a credit card. The data from banks indicates that loan providers prefer a credit score which is greater than 700. Transunion score is a history of your credit profile, so do make sure that you manage your credit in such a manner that your score stays above 700.

2. Regulatory Body of Home loans? : NHB (National Housing Board) was established in July 1988 under National Housing Bank Act 1987 as governing body for all the home loans in India. It is a subsidiary of Reserve Bank of India. NHB was formed to create a system of long term home loans, to provide financial support to home loan companies, to make home loans affordable, to promote network of dedicated housing finance institutions and to regulate the housing finance companies. All rules and regulations related to home loan credit are as per the guidelines of NHB.

3. Tenure of Home loan: It ranges from 5 years to 30 years. While deciding on the loan tenure, certain factors need to be considered. The most important factor (MIF) in deciding home loan tenure is net disposable income. Net disposable income is the money that you are left with after paying for all the deductions like PF, ESI, Gratuity and Taxes. From this net disposable income the EMI is served every month. If you have a low net disposable income, long loan tenures may suit you fine. But be aware in such a case, though the EMI would reduce, you would be paying interest for a longer period of time. A loan with a shorter tenure would bring with it payment of lesser interest, but of course a higher EMI. Also while deciding tenure things which should be kept in mind are stability of Job, chances of promotion or increment, continuity of income, etc.

4. Interest Rate: There are two models of interest rate in the market. One is fixed interest rate concept where the rate of interest and EMI remains same for the complete tenure of the loan or till the time loan account is closed whichever is earlier. The second and most common type of concept is floating interest rate home loan. In such home loans, the interest rate and tenure of EMI is dependent on the base rate of the lender. As the base rate changes the home loan interest rate and tenure also changes. Fixed rate home loan are beneficial when the interest rates are expected to rise in the near future and floating rate home loans are beneficial when interest rates are expected to fall in near future.

5. Loan Eligibility: The loan amount to be sanctioned depends on your income and previous track record of repaying your loans and credit card dues. Home loan lenders generally provide 80 per cent of the value of the property as the loan amount, subject to your income. While assessing the income criteria, they do not consider some of your salary slips heads for calculating your net monthly income. They only consider the income heads which can be used to repay your loan. For example, your LTA and medical allowances are deducted from the monthly net salary you receive. You are expected to spend the amount received under these heads for the specific activities they are being provided for. This is one of the reasons why we generally see a difference in the eligibility amount quoted in the website and actual amount realized once the application is processed.

6. Foreclosure/ Prepayment Charges: Earlier banks/home finance companies used to charge foreclosure or prepayment charges if the loan is prepaid before due date. Such levy of charges was detrimental to the interest of borrower as he or she was hesitant to switch over the loan to take lower interest rate benefits offered by other banks. This system of Foreclosure/ Prepayment Charges was prohibited by RBI in its Master Circular on customer services in bank dated 02nd July 2012. This prohibition is only applicable on floating interest rate home loans and not on fixed interest rate home loans. So always keep in mind that if you have taken a floating interest rate home loan you can foreclose it anytime you wish to without paying any charges.

7. Negotiate: Do negotiate your interest rate with the lender. Despite all claims of being fixed, lenders do accommodate up to a few basis points. Many a times, financial institutions reserve their best of rates for loans that are to be disbursed quickly. So approach them only when you have finalized your property deal and you require disbursement shortly. Most lenders have monthly targets to complete, so if you are around the end of the month, your negotiating could probably fetch you an attractive rate. Also there is scope for negotiations in processing fees and waiver of up to 50% is achievable if negotiated properly. You never know, negotiations might pay off. “Baat karne se hi baat banti hai”.

8. Home Loan Charges: When opting for home loan, you should be aware of other charges that come with it. Lender’s charge processing fees, service fees and administrative expenses. These charges are a percentage of your loan amount that is actually sanctioned to you, and not on what you actually take home. When the EMI’s start rolling in, charges for swapping post-dated cheques, modifying monthly installment or tenure etc would be billed to you. So check the lenders schedule of charges properly and if possible avoid making such changes.

9. Loan Agreement: Don’t be afraid of the bulky loan agreement. Ensure you read it carefully, though it may seem a bit difficult. Your lender may agree to a lot of points verbally, but it’s what is mentioned on the agreement that finally holds good. Never sign a blank loan document, even if the marketing personnel tell you to do so. Check the details filled in your loan document to ensure that the terms are the same as what you agreed.

The Points mentioned above are not the only things to remember. These are the 9 most important ones based on the personal opinion and experience of the writer.

Buy your dream home quickly but safely.

Hitesh Dhanuka:

Writer is a Chartered Accountant and Director, Dhanuka Group